As it turns out, the big economic story of 2023 is not a recession, as many had predicted — it’s the disconnect between consumer sentiment and behavior.
Higher than normal inflation over the past two years is an obvious reason that people would be down about the economy. The puzzle is why people are still behaving as if their economic situation is good. Inflation-adjusted consumer spending is way up: Not only above 2019 levels, but above the pre-pandemic trend. In fact, it’s largely the reason that US economic growth is above expectations. And yet consumer sentiment is at levels typically seen only in a recession.
All of which raises the question: What’s going on?
Economists tend to believe actions over words. You can insist that you prefer a vegetarian diet, but if you keep eating hamburgers, we will conclude that you actually prefer an omnivore diet. So if you say the economy is terrible but spend like it’s 1999, some economists will tend to trust what you do over what you say — and question the reliability of the polls.
These economists argue that the data showing a strong economy, including outsize consumer spending, imply that people are not being honest about how they feel about the economy. Instead, they are aligning their views with their political preferences. This argument maps on to the large disparity between Republican and Democratic views of the economy, a gap in attitudes that is not matched by a gap in their economic experience.