Prosperity on Paper, Discontent amongst Citizens: What It Means for the Upcoming American Election?

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 A stark dichotomy exists within the American economy: at the macro level, it’s thriving post-pandemic. Unemployment is at a historic low of 4%, inflation has eased to 2.5%, and GDP growth exceeds expectations at 3%, outpacing many global economies and defying recession fears. Yet, despite this recovery, public sentiment tells a different story. As of August 2024, only 14% of voters believe the economy is strong, with confidence levels just 10 points higher than during the 2008 Recession. This disconnect between economic success and widespread pessimism raises critical questions about the nation's financial well-being and the way voters view the upcoming election.

American Consumer Sentiment

To understand the roots of this economic dichotomy, we must look back to March 2020, when the world came to a standstill due to the Pandemic. Over 23 million U.S. jobs were lost, supply chains were disrupted, and global economists predicted deep recessions in nearly every country, including the U.S. Yet, the American economy’s recovery has been remarkable. By the end of 2023, real GDP per person had returned to pre-pandemic levels, employment surpassed 2019 numbers, and average 401K or IRA value reached an all-time high. Adjusted for inflation, wages today are higher than before the pandemic, with the largest gains among the lowest-paid workers. Although inflation spiked above 5% from May 2021 to April 2023, the Federal Reserve has nearly brought it back to its 2% target and that too, without triggering a recession, achieving a rare “soft landing.” In contrast, many European economies are still struggling to recover, making the U.S. an outlier in post-pandemic economic resilience.

American Economy Performance compared to other G7 economies

What set the U.S. apart from other developed economies? The answer lies in the $1.9 trillion American Rescue Plan signed by Biden in March 2021. Surpassing the $800 billion Recovery Act under Obama (during the 2008 Financial Crisis), this stimulus injected $1,400 directly into citizens' accounts, funded a national vaccination program, provided direct aid to households, and offered relief for businesses. This massive influx of support helped employers rehire and boosted consumer spending, especially as lockdown savings combined with pent-up demand. Businesses saw sales rebound, job seekers found opportunities, and industries like travel surged. The stimulus effectively jump-started the economy, leaving nations like China and Japan in awe. Yet paradoxically, the very package that revived the U.S. economy has now become a political liability for Democrats, as citizens feel the sting of the package’s looming effect: inflation. 

Inflation skyrocketed from 1.4% in January 2021 to a staggering 9.1% by June 2022, before settling at 2.5% today. Over the past three years, it has been a major strain on Americans. The American Rescue Plan boosted consumer demand, and increased wage rates—factors which contribute to inflation. Having said that, even without the Rescue Plan, inflation would have still spiked due to pandemic-related supply chain disruptions, dislocations, and pent-up demand. Economists debate the extent of the plan's role in inflation, with most agreeing it played a significant part—somewhere between Democrats' downplaying and Republicans' exaggeration. What brought relief at the time has since fueled inflation, leaving many frustrated and struggling with the rising costs it helped accelerate.

Consumer Price Index (CPI)
Source: U.S. Bureau of Labor Statistics

Apart from inflation, there are many factors that have significantly dampened consumer sentiment. First, mortgage rates have surged, largely due to the Fed’s efforts to cool down inflation by increasing interest rates. Moreover, landlords feel the pinch of inflation too, and have increased rents to secure their financial stability.While high mortgage rates and soaring prices are quantifiable factors that are evident on paper, two additional qualitative elements have also contributed to the decline in consumer sentiment—factors that reveal just how accustomed Americans have become to financial comfort.

First, during the pandemic, many enjoyed a reprieve from federal loan payments, generous child tax breaks, high unemployment benefits, and direct cash payments. Now that these benefits have expired, many Americans are struggling to readjust to a more typical economic landscape. Second, the negativity in the news also impacts consumer sentiment, regardless of its actual correlation to economic well being. Since 2020, polarization has increased multifold in the US, the divide between left and right has become wider, especially amongst Gen-Z. Furthermore, wars in the Middle East and Ukraine have also reduced optimism. As news outlets and social media increasingly focus on negative stories, this creates an environment where citizens' overall dissatisfaction with the state of the country spills over into their perceptions of the economy, even when economic indicators may not support such pessimistic views. 

While the world marvels at U.S. economic growth, characterized by impressive GDP growth, spectacular stock market rallies, and the meteoric rise of companies like NVIDIA whose valuation is greater than the GDP of many countries, the American citizens are certainly humming a different tune. And this leads us to the most important question: how does this dichotomy influence the upcoming U.S. election? To address this, we must first grasp what will resonate with the electorate. While the far right and far left have largely made their choices, the priorities of centrist voters are crucial.

For voters, while issues like abortion and immigration are significant, economic concerns—such as food prices, job availability, housing costs, taxes, and programs like Social Security and Medicare—are paramount. Vice President Harris has pledged to lower food prices by tackling monopolies, build 3 million new homes, and slash the costs of commonly used medications by over 40%. In contrast, Trump aims to eliminate taxes on Social Security benefits, reduce corporate income tax, and raise tariffs. The pivotal question remains: can Trump persuade voters that the perceived shortcomings of the Biden-Harris administration are too great to overlook and that he can cultivate a stronger economy? Can Harris demonstrate her ability to address past challenges and foster economic growth that aligns with citizens' needs?

Currently, we know that consumer sentiment depends on four primary factors: high prices, mortgage rates, economic policy benefits, and media optimism. Although prices and mortgage rates are shaped by broader economic trends that go beyond the election, the White House's occupant will undeniably influence consumer sentiment through levels of polarization in the country, the quality of America's international relations, and the prevailing narratives in the media. Whether consumer sentiment increases in optimism, decreases, or stays the same- only time will tell. After all, there’s just a few weeks to go.

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Appendix:

American Rescue Plan:

These are some key details about the American Rescue Plan, which helped boost the American economy during the Pandemic.

  • Direct Payments: Provided up to $1,400 per individual for millions of Americans to stimulate consumer spending and offer immediate financial relief.

  • Extended Unemployment Benefits: Added $300 per week to unemployment benefits through September 2021.

  • Child Tax Credit Expansion: Increased the child tax credit to up to $3,600 per child and made it fully refundable.

  • Vaccination and Health Funding: Allocated billions to COVID-19 vaccination programs, testing, and healthcare infrastructure to fight the pandemic.

  • Support for Schools: Provided $130 billion to help K-12 schools reopen safely, with funds for ventilation & reduced class sizes.

  • Aid to Small Businesses: Extended the Paycheck Protection Program (PPP) and created targeted assistance for industries like restaurants. 

  • Rental and Housing Assistance: Set aside $25 billion for rental assistance to prevent evictions and an additional $10 billion for mortgage relief.

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