Why are Americans' perceptions about their economy so incorrect?

Question

According to a recent Financial Times article (paywalled), surveys indicate a large disconnect between current economic facts and the public perception, to where the majority polled are mistaken:

Another example: a Morning Consult poll in March this year asked a more targeted question "Are we in a recession" (no) and 46% of Americans said they think the economy is currently in a recession.

A YouGov/Economist poll in august found that "Only 34% say the number of jobs is increasing, though that has been the case in official government numbers every month since the economy began recovering from the COVID-19 pandemic."

What explains this large disconnect between reality and perception, and have there been previous periods showing such a dramatic economic discrepancy with a similar explanation as now?

Answer 1

Paul Krugman has covered this topic a lot recently in his New York Times column (e.g., New Perspectives on the Feel-Bad Economy, Nov 2023, and numerous others). The answer seems to be a mix of things, so here's my attempt to distill them into a list, ranked approximately by importance.

1. People don't follow economic indicators all that closely. Most people base their assessment of the economy on various heuristics, what Krugman calls "vibes" (e.g., Inflation, Disinflation and Vibeflation, Dec 2023). If the heuristics don't comport with economic indicators, then people's perception of the economy will follow likewise diverge from the story told by the indicators.

2. Perceptions of inflation are sticky. When you have an episode of inflation, once inflation is brought under control, prices do not go back down to their previous level. Rather, they resume their normal slow growth from the higher price level. When people compare the prices of things today to their idea of what those things ought to cost, they see that everything is more expensive than it "should" be. Often they interpret this as due to current inflation, rather than as the aftermath of a previous episode of inflation.

3. Perceptions of inflation are biased toward frequent purchases and away from significant purchases. I saw this one in an article today about consumer misperceptions of inflation. The author makes the point that price indexes are weighted by the fraction that they make up in an average consumer's budget. Therefore, big-ticket purchases like furniture and consumer electronics get a larger weight than day-to-day purchases because on average they make up a larger share of consumers' spending. However, the day to day purchases are more salient in consumers' memory because they are likely to have bought those things more recently.

4. Some of the most visible indicators are lagging indicators. Most workers' rent and pay rate get adjusted at most once a year, so at any given time many of them are still working off of last year's number.

5. Bad news sells. The news media devote more column inches and air time to bad news than they do to good news. So, when economic indicators are bad you get a prominent and lengthy article about what it all means. When they are good it often gets relegated to a "news in brief" sidebar where it is easily missed.

6. Some of the strong economic indicators are not that relevant to individuals. GDP growth in Q3 of 2023 was 5.2% annualized, which is phenomenal, but what does that mean to individual citizens? In the long run it's better for growth to be high than for it to be low, but in the short run it's just a number. People are more concerned with their personal situation here and now than they are with the economy as an abstraction.

If you take all of that together, it's a recipe for public sentiment on the economy that responds quickly when things deteriorate and recovers slowly when things get better, which is pretty much what we are seeing in the polls.

Answer 2

Americans, in general, don't know much of how the economy works. Ask someone to tell you the difference between national debt and the national deficit, or why either is important. You're likely to get back all sorts of erroneous answers. The Financial Times(FT) article seems to fail to take into account the currently dour financial mood of the US

Take Oscar Nuñez, 27, a server at a restaurant in Las Vegas. Foot traffic has been much slower than usual for this time of year, eating into his tips. He’d like to start his own business, but with the rising cost of living, he and his wife — who works at home answering questions from independent contractors for her employer — haven’t managed to save much money. It’s also a tough jump to make when the economy feels shaky.

Mr. Nuñez expected better from Mr. Biden when he voted blue in 2020, he said, but he wasn’t sure what specifically the president should have done better. And he is pretty sure another Trump term would be a disaster.

And that's from a Biden voter. Later they make this note

Ms. McDowell is what’s known in public opinion research as a high-information voter. Polls have shown that those less apt to stay up on the news tend to change their views when provided with more background on what the Biden administration has both accomplished and attempted.

Ms. McDowell is part of a pretty small group. Most folks aren't interested in staying that informed about much of anything, especially governmental policies and economic indicators.

Polls generally measure sentiments, not facts

Ask your average person to define inflation. They probably can't. As a result, asking a person about if inflation has risen faster than wages, and they won't have the faintest idea. But I should note that the way FT phrased their question is a bit misleading. Technically, speaking, inflation has slowed in its growth (chart from link, using "5Y" option)

This should be good news, right? The rate of inflation seems to have mostly gone back to normal. And I'll stipulate that FT is right in saying that wages have gone up in the interim, probably at a higher rate. What the chart ignores is that inflation is compounded. Take milk. This chart (source) only includes numbers through 2022, but it's stark

See how the inflation-adjusted numbers started going up sharply towards the end? The problem is that large sections of the economy have been doing that and people can remember cheaper prices. Worse is that, while wages are rising again, the government's own numbers show wages have not been keeping pace with rising costs

This is why the FT questions are so misleading. While inflation may have slowed, the real effects of higher costs are not going anywhere. When people are asked questions about inflation rates (which have gone down from their historic highs), most people tend to answer in terms of inflation costs (which are only increasing) because that's the only frame of reference they have. Unless prices start to go down, or wages rise enough to match the new prices, the endemic belief that inflation is still running amok likely to persist.

Answer 3

Mostly because the questions revolve around the economy at large, not what people experience. For a lot of these questions there are factors that make the economy look great, but screw over the average consumer. And none of these questions take that into account.

Comparing today to one year ago, which has increased faster on average across the US, prices or wages?

Inflation might drop, but the rate at which companies raise prices does not. Companies like to use inflation as an excuse to raise the price of a product far beyond inflation numbers just because they can blame it on inflation and get away with it. People are still experiencing rising prices beyond inflation numbers even when those numbers drop. People only get x% as a raise matched with inflation, but then have to pay x*y% more for their products.

Do you think the rate of inflation has gone up, down, or stayed the same since this time last year.

Inflation NEVER brings prices down. So people experience a bout of high inflation and all of the prices for their daily purchases goes up. When the rate at which they go up changes to a smaller number that doesn't make their expenses any less. They're just experiencing prices going up. This also does not account for factors outside of inflation, such as companies inflating the prices of products 30%, 40%, 50%, 100%, 200% beyond the inflation numbers. This does not account for enshittification where people get worse products for the same money. They do apparently try to account for shrinkflation and the metrics for that could apply to enshittification, but companies will often take measures to counteract this such as adding weights to tech products to make them feel more 'premium'. Or they will apply shrinkflation as well as enshittification so the numbers reflected in the CPI are mainly the shrinkflation numbers, not accounting for lowered quality. This does not account for when companies collude (intentionally or by greed motive) to never drop prices or raise prices at the same time.

In terms of net worth do you think the median American household is wealthier today than before the pandemic?

This might not account for the market price of their assets being higher, even though they have less assets in general. Someone who has a 2 year old car might have a more valuable car than a 2 year old car last year. But they still only have 1 car. Maybe it's a worse car that retails for a higher price. They have less in their house even though it costs more so it looks like they have a higher net worth on paper, just not in reality.

Do you think someone on a median income could afford a better lifestyle today or a year ago?

This depends on how you define lifestyle. If you just look at the prices of things that they have it's the same problem as the above question. If you are asking what they have access to and can do with their resources, then you'd get a completely different answer. Fewer people can go on vacations, fewer people can save any meaningful amount of money, more people are living paycheck to paycheck. If you look at employment numbers as an indicator, then it looks great. More people are employed now than in the last decade. But a lot of those jobs are gig jobs where the person can barely afford the gas for their car that they are using for uber. It all depends on how they define 'better lifestyle', but they don't include that definition here.

Do you think the share of Americans living in poverty is higher today than 30 years ago?

This is another definition problem. The definition of inflation generally has to do with living off of x dollars per day. But has that number kept up over the last 30 years? Unlikely. Does that number account for companies charging more and more for less and less and worse and worse products that degrade sooner and need to be replaced more often? Unlikely. If the definition of poverty is different, then you'll get a different answer. Try answering how many people are living paycheck to paycheck. And the people who were around 30 years ago tend to be the ones who already have a home and over estimate the ability of people today to get houses and cars and a good job and so on. Their experience is detached from reality because they are not living it the same way as the rest of us.

I could keep going, but you maybe get the point by now. Factors that improve the economy at the expense of the average person are always going to give different answers to the data if your data does not take into account the experience of the average person. And especially when their definitions are not stated upfront.

Answer 4

Responders have no incentive to answer correctly or honestly.

Polls are not high-stakes exams with one's future at stake. Nor are they quiz shows that award prizes for the correct answers.

Consider a responder who knows all the correct answers but passionately hates whichever party/president happens to be in power. She'd probably prefer to use this as an opportunity to express/vent her negative opinions than to give any correct answers.

So, instead of asking why their perceptions are so incorrect, one might instead ask why the answers they choose to give are so incorrect.

(This by the way is why economists tend to place a low value on what people say and more on what people do.)

(Note: I don't disagree with most of the points given in the two highest voted answers. This answer is just to supplement those other answers with a small point that doesn't seem to be mentioned yet.)

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To further illustrate my point, suppose we changed the median household wealth question to this:

It is a fact that between 2019 and 2022, real median household net worth (or wealth) increased by $X, where

X = 72 × 34 - 93 × 14 + 913 × 32 - 53 × 119 + 512 × 66 - 82 × 96 + 73 × 25.

(Note that X could be negative.)

Do you think that X is positive, negative, or about zero?

Consider the difference in the percentage of correct answers if respondents were given sufficient time to answer and were also given $100 for the correct answer (versus the typical poll where respondents are pressured to respond quickly† and have no incentives to give the correct answer).

In the setting of a typical poll, most respondents will of course be unsure of the correct answer to the above question. And so, lacking time and incentives to solve the above problem, they may choose to simply and quickly give the answer that paints a negative picture of the economy and those in power.

This is not an outright lie. Instead, it's just a quick answer to an incentiveless poll that saves them their time and mental effort and also serves as a free opportunity to vent.

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According to the Survey of Consumer Finances (2022, p. 12), real (household) median net worth was $141,100 in 2019 and $192,900 in 2022. That is an increase of $51,800 (which is the value of X above).

†In theory, poll respondents may have unlimited time to answer each question. But in practice, respondents will answer quickly in order to (1) save their own time; (2) not be embarrassed about wasting the pollster's time; (3) not sit for an hour in awkward silence; (4) not be embarrassed about appearing stupid and having to take an hour to answer a simple three-choice question.

Answer 5

My dear, here we must run as fast as we can, just to stay in place. And if you wish to go anywhere you must run twice as fast as that.

I believe that consumers have built-in expectation that some growth would be taking place. So 3% growth is the new zero.

So, imagine if wages, on average, were growing 6% whereas prices grown 4% on average. 6 - 4 = 2, so that's lower than "the new zero", so prices must be subjectively growing faster than wages.

Also, wages growth is famously uneven, with first quintile reliably overperforming in it whereas fourth and fifth underperforming and third one stagnating. Moreover, people are very sensitive to price squeeze: If they know one household having trouble paying their bills now due to prices growth, it won't matter that three more now have slightly more disposable income.

So I would say that Financial Times are trying to sell the rose-colored picture which the consumers are not buying. First of all, they focus on a time frame which is irrelevant to the consumers, where they are finally able to show some marginal economic improvement, perceived by consumers as "too little, too late".

In short, the the consumers are reacting to an over-praised but wimpy period of relative growth which follows a much longer period of disarray and stagnation.

Answer 6

Even though the questions in the polls have the appearance of being quite objectively measurable the answers are far from being objective.

Take the question about prices: There is no golden truth about price development, instead economy create virtual baskets with items which they believe consumers want. What you put in the baskets determines how big your inflation is: If you put the cheapest can of corn you can find on a shelf in the basket your inflation is lower than it is if you put the cheapest can of non-GMO corn in there.

Then look at the question about "better lifestyle" it doesn't get much more subjective than that.

Equally you can define recession very differently, and published employment rates often have been subject to trickery (e.g. counting part time jobs that clearly cannot sustain a living).

So there is clearly an agenda in the questions being asked, and the numbers provided by the Financial Times and similar (who serves a very specific clientele), and not everyone in the US might agree with that agenda.

Answer 7

According to political blogger Kevin Drum, this is mostly due to partisan belonging: Only 5% of Republicans think the economy is good, especially since Joe Biden's election. A poll conducted in August shows that as opposed to Democrats, Republicans think the national economy is bad even though a majority of them consider that their personal financial situation is fine.

Kevin Drum's interpretation:

In other words, when you see polls showing that "Americans" are losing confidence in the economy—and this is indeed the direction of recent polling—it's driven almost entirely by Republicans. And I think even Rothman would probably agree that 5% is too absurd a number to reflect actual reality. It's almost pure partisanship, not a genuine view of how good the economy is.

Answer 8

The United States is a very unequal society. Things can be getting better for some people and worse for others.

This quote is illustrative:

Take Oscar Nuñez, 27, a server at a restaurant in Las Vegas. Foot traffic has been much slower than usual for this time of year, eating into his tips. He’d like to start his own business, but with the rising cost of living, he and his wife — who works at home answering questions from independent contractors for her employer — haven’t managed to save much money. It’s also a tough jump to make when the economy feels shaky.

The poll is also a bit misleading. They took specific measures, "unemployment v. 30 years ago", that are positive, when they could have chosen some that are negative, "unemployment v. last year". They ask about the "rate of inflation", but many people probably interpret that to mean, "have prices gone up since last year?" The rate of inflation is still much, much higher than historically, even if not as bad as last year.

Answer 9

Americans' incorrect perception about the economy are not an exception but just one example of the many false beliefs Americans harbor.

A fairly extreme and connected example is the perception of crime. The perception of the prevalence of crime is mostly decoupled from reality. In this Gallup poll, crime in the area where people live is considered extremely or very serious by only 17%, while 63% of the same people think it is very or extremely serious in the U.S. as a whole.

Because their information about the rest of America is second-hand, in particular traditional and social media, we can infer that this second-hand information draws a distorted picture of reality.

But what media report is only one side of the coin. Which part of the media people consume, and in which way, is the other. From the fact of these wrong beliefs we can conclude that too often, non-trustworthy sources are consumed and taken for the truth. And paradoxically, the attempt to consume media more critically may lead to embracing even less trustworthy sources, for example social media posts instead of mainstream news.

In general though, large parts of the American public harbor believes which seem outright bizarre to an outside observer. Large minorities, for example, believe that man was created by the Christian god a few thousand years ago¹. A robust majority of 61% are ignorant and arrogant enough to think that America is literally blessed by that same god. In 1985, 53% agreed that the Soviet Union was an evil empire.² Almost half of the Americans think that Donald Trump should be President again. Compared to that, underestimating economic performance seems a minor technicality.

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_{¹ That number depends a bit on the exact way you ask. It appears that a stable majority believes in some form of divine intervention or another. The proportion who believes man was outright created in the present form varies between 18% and 40%.}

_{² The wording is no coincidence, the religious connotation was fully intentional: Reagan's infamous "Evil empire" speech speech was delivered to the National Association of Evangelicals.}