A new analysis reveals a stark disconnect between how Americans perceive the economy and the actual data on living standards, a puzzle that continues to challenge economists. According to a report from Yahoo Finance, consumer sentiment is near historic lows even as objective measures of well-being have reached all-time highs.
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Living Standards vs. Public Perception
Harvard economist Jason Furman, a former advisor to President Barack Obama, has compiled statistics showing that American life has improved dramatically since 1970. Material conditions have broadly improved: bedrooms per person have increased by 61%, air conditioning usage has risen by 675%, and typical wages, adjusted for inflation, are up 44%. College attainment has grown by 252%, and life expectancy has increased by 11%. Meanwhile, the share of people living without plumbing has fallen by 97%, the poverty rate has dropped by 61%, and air pollution has decreased by 73%.
Despite these gains, the University of Michigan’s Index of Consumer Sentiment reached its lowest point on record in May and remained near that low in July, even after a temporary uptick linked to falling gasoline prices. This disconnect is historically unusual: before 2020, consumer sentiment could be reliably predicted by the unemployment rate, inflation, and stock prices. That relationship broke with the onset of the COVID-19 pandemic and has not realigned since.
The Role of Political Division
Furman, who presented his findings at the Federal Reserve Bank of St. Louis, attributes a significant part of the phenomenon to what he calls affective polarization. This term describes the tendency for people to hold stronger negative feelings toward the opposing political party than positive feelings toward their own. Furman notes that this type of polarization is particularly intense in the United States and is linked to excessively negative views of the economy.
According to Furman’s research, the consumer sentiment index is currently 50 points lower than what fundamental economic measurements would suggest. While he did not claim to have a definitive answer to the puzzle, he identified affective polarization as a major contributing factor.
The disconnect has notable political implications. Although consumer sentiment has hit all-time lows, consumer spending has continued to accelerate steadily, indicating that public feelings about the economy are having a greater impact on the political landscape than on actual economic activity.
