The nation may not be in recession, but Americans are reckoning with a classic recessionary symptom: feeling poorer.
Half of American respondents say they are worse-off financially than a year ago, according to a Gallup poll released this month. In nearly 50 years of polling on this question, only once before have so many people reported dwindling fortunes: during the Great Recession of 2008 and 2009.
The nation’s collective economic ennui has far-reaching implications, observers say, on everything from consumer spending to President Biden’s reelection hopes.
The average individual retirement account lost nearly one-quarter of its value last year, Fidelity Investments reported Thursday. American homes shed $2.3 trillion in value from June to December, according to new Redfin data. The average worker saw hourly wages fall by 1.8 percent in 2022. That’s after adjusting for inflation, an old economic foe that returned to bedevil the American consumer last year.
And many Americans don’t expect things to get better anytime soon. Another Gallup poll shows that a record-high 48 percent of the nation believes the stock market will decline in the next six months. Most respondents also expect both inflation and interest rates to rise.
But not all the economic tidings are so grim. Employment rose by 517,000 in January, trimming the jobless rate to 3.4 percent, the lowest mark since 1969. Biden took credit for “the strongest two years of job growth in history” in remarks this month.
“We have a weird economy right now,” said David Bateman, an associate professor of government at Cornell University. “You can take all the measures seriously, but the measures are pointing toward different things.”
Consumer spending rebounded in January after a lackluster holiday season, another good tiding amid bad ones.
Yet, most Americans feel squeezed. The chief culprit is lingering inflation: the average consumer good cost 6.4 percent more in January 2023 than in January 2022. Food costs rose 10 percent.
Inflation peaked at 9 percent last summer, the highest rate recorded since 1981. Over much of the previous four decades, the Consumer Price Index had barely registered in the national consciousness.
“It’s the part of the economy that people relate to the most,” said Callie Cox, an investment analyst at eToro, an investment platform. “When you go into a grocery store, you notice inflation. When you drive by a gas station, you notice inflation.”
The Federal Reserve stepped in to tamp down inflation with the most dramatic series of interest-rate hikes in decades. At the start of 2022, the benchmark federal funds rate was effectively zero. The fed has raised the rate eight times since March. It now exceeds 4.5 percent.
As a result, inflation and high borrowing costs are pinching American consumers like jaws in an economic vise.
“Essentially, both inflation and the rate hikes serve as taxes on the economy,” said Mark Hamrick, senior economic analyst for Bankrate.com, a consumer lending site.
Two or three years ago, as Americans waited out the pandemic and deposited their federal stimulus checks, bank accounts were flush with savings. Today, the nation is saving less and borrowing more. The national credit card balance hit a record $931 billion at the end of last year.
The national savings rate, another measure of economic health, has hovered below 5 percent since the start of 2022. It hadn’t been that low since 2009.
In a futile effort to keep pace with inflation, Americans are “running down their bank accounts,” said Desmond Lachman, a senior fellow at the American Enterprise Institute. “They’ve still got money to spend. But at some point, we’re going to reach the cliff edge.”
Lower-income Americans are struggling the most. In the Gallup poll, 61 percent of low-income respondents said they are worse off than a year ago, compared to 43 percent of upper-income people.
But even the wealthy feel the pinch. Financial markets, a common preoccupation of the well-heeled, revealed new depths of unpredictability in 2022.
When stocks go down, bonds tend to go up: That is a cardinal rule of investing, and it’s why investors diversify their portfolios with bonds to offset losses in stocks.
Last year, even as the stock market sank, bonds suffered their worst year on record, by some accounts. Analysts blame the toxic combination of inflation and interest-rate hikes.
“Seeing your money getting hit that hard can really damage your psyche,” Cox said.
All of that uncertainty means American consumers will probably spend — and invest — more carefully in the months to come.
“Let’s not say they’ll be spending less, but they’ll be more conservative with their spending,” Hamrick said. “We saw that in the holiday shopping season.” Surveys showed holiday shoppers bought fewer gifts and gave gifts to fewer people.
As economists mull how Americans will spend in 2023, political scientists puzzle over how they will vote in 2024. Biden is up for reelection in 21 months, along with scores of Democratic governors and members of Congress.
History dictates that a bad economy can punish the party in power. Biden will surely labor to persuade the American public that he is presiding over a good economy. Not everyone will believe him.
Remember that Gallup poll about America’s financial health? Republicans were far more likely than Democratic respondents to say they are worse off now than a year ago, by a margin of 61 percent to 37 percent.
In the same partisan spirit, 57 percent of Republicans told Gallup they expect the stock market to go down this year. Only 38 percent of Democrats agreed.
“In recent years, the question of how American voters assess the economy has increasingly become a partisan question,” said Daniel Hopkins, a political scientist at the University of Pennsylvania.
Voters tend to hold the president’s party responsible for the economy. Hopkins and his peers don’t expect a shaky economy in February 2023 to decide an election in November 2024. Yet, even this far out, grim economic tidings can shape a narrative that opposition candidates can carry into election season.
“The number-one factor for incumbents to bolster their chances for election is to run on a strong economy,” Hopkins said. “So, certainly, Joe Biden wants consumers to think it’s a strong economy.”
A bad economy could even drive Biden from office, just as it contributed to President Carter’s loss at the polls in 1980 after a single term. But seasoned observers consider that scenario unlikely.
“People don’t like to fire sitting presidents, even vulnerable ones,” said Alvin Tillery, Jr., a political scientist and director of the Center for the Study of Diversity and Democracy at Northwestern University. “It’s only happened three times in the modern era,” with Carter, George H.W. Bush in 1992 and Donald Trump in 2020.
But a weak economy now could wreak havoc on Democratic incumbents in down-ticket races in 2024, simply by inspiring strong Republican candidates to run against them.
“Quality candidates are more likely to run at every level if they think the chances are good for them,” Bateman said. If the economy spirals into a lengthy recession later this year, “it’s going to be high-quality Republicans down-ticket, all the way.”