Many people are puzzled about the disconnect between how well the US economy is doing and how badly Americans feel about it.
Unemployment is low, inflation has been largely tamed and the economy appears to be growing robustly. Yet consumers have the blues. According to a widely followed sentiment survey, they are nearly as pessimistic today as they were during the 2008 financial crisis and the great stagflation of the early 1980s.
I had always assumed this disconnect would prove temporary. But I’m starting to wonder if it has become structural. One disturbing possibility is that broad swaths of workers no longer have enough spending power to meaningfully impact the economy.
It would explain why the economy continues to grow even as many consumers say they are struggling. It might also mean the US can avoid recession even if unemployment keeps rising, particularly for lower-wage workers. But an economy in which millions of workers are economically invisible may ultimately encounter bigger problems.
One reason I assumed the disconnect between sentiment and the economy would be fleeting is that consumer sentiment first sank around the time that inflation spiked in 2022. I had confidence that inflation would return to more normal levels, even that the price of gas and some food items would decline, and they have. With some of the burden on consumers lifted, I thought sentiment would improve, but it hasn’t, really.
I also attributed some of the disconnect to wages. By my estimate, a sizable percentage of full-time US workers, possibly as many as two-thirds, don’t earn enough to sustain a family of four. That’s a harder problem to solve than inflation, but I expected that an economy propelled mostly by consumer spending would eventually stumble and have to reckon with wages if enough consumers struggled. After years of sagging sentiment, though, real wages are lower than they were in 2020 and consumer spending is indeed slowing, yet the economy hums along.
If anything, the disconnect between sentiment and the economy may grow.
The Bureau of Labor Statistics reported recently that there are nearly a million fewer jobs than previously believed. Federal Reserve Chair Jerome Powell also cited growing risks to the labor market last week in support of lower interest rates. A weaker labor market is likely to further weigh on sentiment. And while it may also drag down the economy, a recession has been widely anticipated – and failed to arrive -- since at least 2022.
What we do see are troubling signs that low- and middle-income consumers are fading in the economic data. The top 10% of earners now account for about half of consumer spending, the highest share since at least 1989, according to an analysis by Moody’s Analytics. The top earners’ share of spending has trended higher since the early 1990s from a low of 35%, matching a rise in income inequality over the same time. Meanwhile, the bottom 60% of wage earners account for less than a fifth of consumption, down from more than 26% three decades ago.
The shrinking economic footprint of three-fifths of America’s workforce raises some uncomfortable questions. Most urgently, if the economy can thrive without the spending of some 80 million workers and their households, what incentive do businesses have to serve them or policymakers to support them? Walmart Inc. may be a preview. The company is increasingly catering to higher-income consumers, and has been financially rewarded for it so far, even as low-income consumers cut back.
Central bankers may face new challenges. The Fed bolsters the labor market in part by lowering interest rates. It can do that without fearing higher prices because, historically, rising unemployment has often been a drag on consumer spending and, thereby, accompanied by recession and disinflation. But if the link between unemployment and recession breaks because laid off workers don’t contribute much to spending to begin with, then unemployment could rise alongside a still growing economy. In that scenario, lowering rates to support the labor market would risk stoking inflation, a dilemma the Fed may now be confronting.
How to shore up wages is yet another question. I favor compensation disclosures for public companies, for a start, which would allow policymakers to evaluate the adequacy of wages relative to living costs. Congress can also give companies tax incentives to grow wages alongside profits.
Whatever the prescription, it’s clear to me that ignoring the frustration workers are expressing will eventually threaten the whole economy, even if that risk can’t be easily quantified.
I have worried for several years that inadequate wages will lead to growing divisions, possible social unrest and declining confidence in US institutions, including our indispensable free markets. Only half of Americans now have a positive view of capitalism, while nearly 40% have a positive view of socialism. New York City voters are poised to elect an avowed socialist as their next mayor.
If sentiment and the economy continue to diverge, we should consider the possibility that the experience of many Americans is no longer meaningfully represented in hard economic data. Then set about broadening participation as if the economy depends on it. Because in the not so long run, it probably does.
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