Turns out how you feel about the economy likely comes down to your paycheck: If your wages are outpacing inflation, things look rosy — if not, well, that's quite dispiriting, a new paper finds.
Why it matters: The paper from economist Darren Grant answers a puzzle plaguing economists and journalists since 2022. That is, why was consumer sentiment so dismal even as the economy roared and unemployment hit record lows?
- The findings have big implications politically as President Biden tries to sell Americans on the success of "Bidenomics."
- The contradiction between how Americans feel about the economy — and the actual state of the economy — will play a key role in the 2024 election, Axios' Hans Nichols writes.
Driving the news: In a speech in Chicago on Wednesday, Biden talked up his economic record, pointing to historic job growth, the low unemployment rate (especially for women and Black people), and his infrastructure legislation, among other things.
- Biden touted record wage growth for low-wage workers, too.
Between the lines: The thing is, the overall picture for wage growth is a less positive story. Until very recently, real wage growth — that is, factoring in the impact of inflation — was negative for Americans on average.
- Now, finally, as inflation eases, real wage growth is turning positive (see the recent reversal in the chart above). And consumer sentiment is picking up, too, as Axios' Neil Irwin reports.
- The key question now: Will it last?
"The deal isn't really sealed with the American public until real wages start to grow," said Grant, a professor at Sam Houston State University in Texas.
Zoom in: Back in 2014, Grant published a paper looking at decades of consumer sentiment polling and economic data, and found Americans' views of the economy were deeply connected to the unemployment rate: When the jobless rate was low, people's moods brightened.
- When he updated the research last year he found that was no longer true. But he couldn't quite understand why.
- He wasn't alone: Economists and journalists both puzzled over this. Some attributed the shift to partisanship, media coverage, COVID, or inflation.
- Still wondering, Grant spent the past year looking at wage growth data from the Atlanta Fed to see how it correlated with his data on sentiment. Turns out, there was a strong connection — particularly among workers in their 30s and 40s, who are most strongly attached to the workforce.
The bottom line: When people's incomes are going up, they feel better. "It's a pretty straightforward explanation that works," Grant said.
