Why the Economy Feels So Bad, and What It Means for the Election | WSJ State of the Stat

Summary

The script discusses President Joe Biden's challenges towards reelection, highlighting the disconnect between strong economic indicators like GDP growth and low unemployment rates, and the public's pessimistic consumer sentiment. Despite the economy's steady growth and balanced state, inflation, especially in food and housing, has eroded purchasing power, leading to a historic low in the Michigan survey. As the election approaches, the trend in consumer sentiment, which has begun to improve, could be crucial for Biden's chances, alongside other factors beyond economics.

Takeaways

• 😟 Consumer Sentiment is a significant indicator for presidential reelection prospects, historically influencing the outcome based on how voters feel about the economy.
• 📉 Despite the GDP and employment being above average, the Consumer Sentiment Index is significantly below average, reflecting a disconnect between economic performance and public perception.
• 📊 The historic low in the Michigan survey indicates that consumer sentiment is worse than during the Great Recession, which is a concern for President Biden's reelection.
• 💼 Economists view the current economy as well-balanced with steady growth and a strong labor market, but this positive outlook is not yet reflected in consumer sentiment.
• 💰 The personal consumption expenditures price index (PCE) shows that inflation has been above the Federal Reserve's target, affecting consumer spending and sentiment.
• 🍲 Food and energy prices are particularly impactful on consumer sentiment due to their 'stickiness' and the high proportion of disposable income spent on them.
• 🏠 Housing affordability is a significant concern for consumers, with a majority believing it's not a good time to buy a home, which could impact the economy and election sentiments.
• 📈 While inflation is trending downward, the impact on consumer sentiment may persist, as price levels are more important to consumers than the rate of price increase.
• 📉 Real income, adjusted for inflation, has been dipping below the cost of living for most of 2022, indicating that income hasn't kept pace with rising costs.
• 🏆 The 2024 election will be influenced by more than just economic factors, as both candidates have track records and will need to convince voters on a variety of issues.
• 🔼 The upward trend in consumer sentiment, despite still being low, could be a positive sign for President Biden's reelection campaign, as trends are more important than absolute levels.

Q & A

What is the significance of the gap mentioned in the script regarding President Joe Biden's first obstacle towards reelection?

The gap signifies the discrepancy between the actual economic performance, as measured by GDP and employment, and how voters feel about the economy. This divergence can impact the outcome of the election, as historically, incumbents tend to win when consumer sentiment is high.

What is the Consumer Sentiment Index and why is it important for understanding the political climate?

The Consumer Sentiment Index is a national survey conducted by the University of Michigan that gauges consumer confidence and economic sentiment. It is important because it historically correlates with election outcomes, with incumbents typically winning when consumer sentiment is high.

How did the Consumer Sentiment Index perform during the period covered in the script?

The Consumer Sentiment Index reached a historic low, even worse than during the Great Recession, indicating a significant disconnect between the actual economic performance and how consumers felt about it.

What is the current state of the economy according to the GDP growth mentioned in the script?

The GDP, which measures the total value of goods and services produced, grew by over $1 trillion in 2023, with a 2.5% increase when adjusted for inflation. This growth is within the targeted range of 2 to 3%, indicating a well-balanced and steadily growing economy.

What does the unemployment rate indicate about the current labor market?

The unemployment rate has remained below 4% for the last two years, which is the longest stretch in decades. This suggests a strong labor market where almost everyone who wants a job has one.

How does inflation affect consumer sentiment and the perception of the economy?

Inflation, particularly in essential items like food and energy, can significantly impact consumer sentiment. High inflation can lead to increased costs for consumers, which may cause them to feel worse about the economy, even if other economic indicators are positive.

What is the significance of the personal consumption expenditures price index (PCE) mentioned in the script?

The PCE is used by the Federal Reserve to gauge inflation. It is significant because it helps determine if inflation is within the targeted range and can influence monetary policy decisions.

Why are food and energy prices particularly important when considering consumer sentiment?

Food and energy prices are important because they are essential expenses for consumers and can significantly impact their disposable income. When these prices rise, consumers may feel the pinch more acutely, affecting their overall sentiment about the economy.

How has the increase in food prices affected consumers' disposable income?

The increase in food prices led consumers to spend over 11% of their disposable income on food, the highest percentage in over 30 years, indicating a substantial financial burden on households.

What is the term 'sticky' used to describe in the context of food prices?

The term 'sticky' is used to describe prices that, once increased, are unlikely to decrease. This is particularly relevant for food prices, which can have a lasting impact on consumer sentiment.

How does the trend of the Consumer Sentiment Index leading up to the election affect the incumbent's chances of winning?

If the Consumer Sentiment Index is trending upward leading up to the election, it can be a positive sign for the incumbent, even if the absolute level of sentiment is still low. This upward trend can indicate improving economic conditions and consumer confidence.

What factors other than the economy might influence voters' decisions in the 2024 election?

Factors such as long-term financial security, social and political threats, and the candidates' track records can influence voters' decisions. Additionally, voters may consider non-economic issues and the perceived ability of the candidates to address those issues.