While the political world is focussed on the G.O.P. primary in New Hampshire, the financial markets have been assimilating some positive economic news—a very welcome development for the Democrats. On Friday, the University of Michigan reported that its index of consumer sentiment rose by thirteen per cent in January, reaching its highest level in two and a half years. The index has jumped twenty-nine per cent in the past two months, which is the biggest such increase in more than thirty years. This month, “there was a broad consensus of improved sentiment across age, income, education, and geography,” Joanne Hsu, the director of the Michigan survey, said in a statement accompanying the release of the January figure. “Democrats and Republicans alike showed their most favorable readings since summer of 2021.”
The Michigan index, which is based on detailed telephone interviews with a sample of roughly six hundred people, is one of two surveys of consumer sentiment that Wall Street monitors closely. The January update from the other one—an index of consumer confidence produced by the New York-based Conference Board—will be released next week. Last month, that index showed a significant uptick in optimism among all age groups and income levels, a result that was consistent with those of the Michigan survey.
To be sure, the Michigan index is still well below its pre-pandemic level, but it is now back to about seven per cent short of its historical average. (If the trends of the past couple of months continue, it will soon be above its historical average.) Moreover, the latest data were released on the same day that the S. & P. 500 stock index reached a new all-time high—a vote of confidence from investors in the economy’s prospects following strong job growth and a substantial drop in the rate of inflation. “We have more work to do, but we’re on the right path as we execute President Biden’s agenda, and people are starting to feel it,” Jared Bernstein, the chair of the White House’s Council of Economic Advisers, said in a statement about the rise in consumer confidence.
The note of caution that Bernstein struck at the beginning of his statement may reflect a fear among President Biden’s advisers of getting out ahead of the American public, 58.6 per cent of which still disapproves of Biden’s handling of the economy, according to the RealClearPolitics poll average. So far, there’s little sign that good economic news—and rising consumer sentiment—is translating into a boost in Biden’s poll ratings. But, with nearly nine and a half months until November 5th, Democrats have grounds for hoping that will change before Election Day. At the least, the rebound in consumer sentiment challenges the narrative that Americans’ views of the Biden economy are already set in stone.
When the inflation rate jumped to nine per cent in the summer of 2022, the Michigan index plunged to its lowest level since the report was launched, in 1978. In the United States, as in other countries, people reacted very negatively to a sharp rise in the cost of living, which diminished their purchasing power and came after more than three decades of generally low inflation. The sticker shock from higher prices hasn’t gone away: in an Economist/YouGov poll released last week, seventy-three per cent of respondents identified “inflation/prices” as a very important issue to them. (That was the highest figure for any policy issue.) But, with the rate of inflation having fallen sharply—last month, it was 3.4 per cent—and gas prices now under three dollars in many parts of the country, some of the unrelenting pessimism about the economy seems to be abating. Since June, 2022, the Michigan consumer-sentiment index has risen by nearly sixty per cent.
Given the flurry of positive economic news recently, that shouldn’t be surprising. What’s more surprising is how long it’s taken for the public narrative about the economy to change. In the past year or so, analysts have puzzled over why public sentiment about the economy has remained so negative despite inflation falling, G.D.P. growing steadily, and wages rising faster than prices since last summer. Going by the results of the Economist/YouGov poll, the obvious answer is inflation. But, last month, John Burn-Murdoch, a data whiz at the Financial Times, pointed out that Britain, France, and Germany also experienced big jumps in consumer prices, and yet their consumers haven’t been as gloomy as Americans have been. “The Europeans all feel about as confident as one might expect based on how their economies are performing,” Burn-Murdoch wrote. “Disproportionate doom seems to be a new American affliction.”
There has been much debate about the reasons for this disconnect. Some commentators blame negative media coverage: in 2022 and much of 2023, there were countless stories about the likelihood of a recession. (To be fair to reporters, these stories reflected a mistaken consensus among economists that a slump was imminent.) Burn-Murdoch also pointed to increasing partisanship in the United States, suggesting that it may be prompting people to answer surveys on the basis of their political affiliation rather than their actual experiences. Others say there isn’t a disconnect at all: although inflation has come down, the cost of many items, such as eggs and cars and mortgage loans, is much higher than it was before the pandemic.
Whatever the explanation, political strategists from both parties will be closely watching the consumer-sentiment indexes in the coming months and looking back at the history of incumbents running for reëlection. Through the first half of 1992, the Michigan index rebounded from a big drop during the second half of 1991, but between July and October it fell back again, and George H. W. Bush lost. In the twelve months before the 2012 election, the index rebounded from a sharp drop in the summer of 2011, albeit with a dip in June and July of the election year, and Barack Obama won. Biden will be hoping to follow the example of his former boss. ♦