The economy is viewed negatively by everyday Americans due to inflation.

• Recent high inflation seems to have negatively impacted consumers' perceptions of the economy.
• Despite a strong labor market, appreciating home values, and a rebounding stock market, some people remain discontent with their financial situation.

Looking back at 2023, Kyle Connolly sees it as a year marked by transformations and obstacles.

The single parent who recently returned to work was laid off from her job at a custom home-building company in November. Meanwhile, Connolly has observed an increase in prices for various items, including groceries from Aldi's and utility costs for her condo.

She has reduced her everyday luxuries, such as eating out or going to the movies, in order to save money for Christmas. As a result, her three kids will experience a more modest Christmas celebration this year compared to previous years.

The 41-year-old stated, "I've cut back on everything I could, but it's tough to say no to my kids when they ask for more at the grocery store checkout."

In Florida's panhandle, the economic woes have become more apparent within the community. Connolly has observed a decline in the number of 2022 Suburbans on the road, replaced by older Camry models. The waters that were typically filled with boats have been unusually quiet, as owners have either sold them or tried to cut back on gas costs. Parents in the community have turned to Facebook groups to discuss ways to conserve money or generate extra income.

The dilemma that economists are grappling with is why the average American feels unhappy about a strong economy despite its positive state.

‘High prices really hurt’

According to various sources, the year has been successful in terms of price growth and labor market performance. The annualized rate of price growth is approaching the preferred level of the Federal Reserve, and there is optimism that monetary policymakers have managed to control inflation without causing a recession.

Despite a 17% increase in consumer sentiment from the previous year, the December index reading was still 29% lower than the same month in 2019, according to closely watched survey data from the University of Michigan.

Joanne Hsu, Michigan's director of consumer surveys, stated that the main issue is the high prices that really hurt Americans. Despite their attempts to accept the idea that the extended period of low inflation and low interest rates in the 2010s is not the current reality, Americans are still struggling to come to terms with it.

Hsu is optimistic about the future, as sentiment has improved significantly since its lowest point in June 2022, when the consumer price index rose 9.1% from the previous year. People have started noticing inflationary pressures easing, she said.

The U.S. debt ceiling negotiations caused a drop in sentiment in May, and the 2024 presidential election has added to feelings of economic uncertainty, Hsu said.

Inflation vs. the job market

Although economists predicted that continued strength in the labor market would improve Americans' perceptions of the economy, consumers' individual feelings may place less emphasis on job growth and more importance on inflation when evaluating their financial well-being.

Despite the latest data from the Bureau of Labor Statistics, there are still more job openings than there are unemployed people. The average hourly pay has continued to rise, although at a slower rate than during the pandemic. According to seasonally adjusted Labor Department figures, average hourly pay was about 20% higher in November than it was in the same month four years ago.

The Conference Board's consumer confidence index has rebounded more than the Michigan index, despite its preliminary December reading being around 14% lower than the same month in 2019.

The Michigan index measures financial conditions and purchasing power, while the Conference Board gauges job market sentiment, which aligns with data indicating a more optimistic view of the economy, according to Camelia Kuhnen, a finance professor at the University of North Carolina.

Kuhnen stated that the two measures appear different because they concentrate on distinct aspects of economic reality.

A tight job market can be a double-edged sword for sentiment, Michigan's Hsu noted. While it allows workers to secure better roles or higher pay, it also means shorter hours or limited availability at their repair company or veterinarian's office when those same workers put on their consumer hats.

Silver linings for some

According to economists, only certain groups, particularly wealthier ones, may feel positively about the economy this year due to other reasons.

Kuhnen of UNC stated that Americans would be content if they owned homes and experienced price growth. Additionally, optimism can be found in the stock market's rebound during 2023.

The absence of cushions may exacerbate the financial strain of higher costs for people on lower incomes, while the resumption of student loan payments this year may cause discontent for those with outstanding debts, according to Kuhnen and Dynan.

Marissa Lyda and her family relocated from Portland to Phoenix this year, primarily because of lower housing costs. By selling the property she purchased in 2019, her family was able to afford a more luxurious home in Arizona.

Despite the lower income tax in Arizona, Lyda has had to deal with an interest rate on her new home that is more than twice what she was paying on her old one. Although the lower income tax has helped her family financially, Lyda has had to allocate a significant portion of that extra money towards her increasing grocery bill.

The mom who stays at home has changed her preferred grocery store from to due to the growing importance of value. She now searches more in the aisles for store-brand food and looks for recipes with fewer ingredients.

Lyda stated that her family's financial situation does not align with the economy experts discuss, as it resembles the TikTok videos and conversations among friends about how inflation continues to affect budgets.

The 29-year-old remarked, "When I read the news about great earnings and growth, I wonder where that growth has come from."

‘Just trying to hold on’

Could it be that social media discussions about a possible recession have led Americans to believe they should feel more pessimistic about the economy than they actually are, which could account for the continued strength of consumer spending despite the typical tendency to tighten spending during times of financial uncertainty?

Although the annual rate of inflation has decreased, consumers are still anxious as prices continue to rise, according to Harvard's Dynan.

The high inflation rates of 2021 and 2022 have left many people still angry, with the daily cost of lunch being particularly salient and resonating in their minds compared to the annual pay increase.

While some inflation is normal, the Federal Reserve aims for a 2% increase in prices each year. Deflation, on the other hand, is viewed as detrimental to the economy.

Although economists are optimistic for the new year, inflation and financial standing will remain top of mind for everyday Americans like Connolly and Lyda.

To ensure her family can afford a memorable first holiday season in their new home, Lyda has cut out weekly lattes from the budget. In 2024, she will monitor the Fed's decision to cut interest rates, which could provide an opportunity to refinance the loan on her house.

Every season of life may not be a huge financial season, as Lyda pointed out. Sometimes, it's about holding on and surviving, which many Americans can relate to.