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Data Says: Economy Is Good! Survey Says: Americans Are Not Happy!

Thoughts of the Week

Survey after survey after survey has been indicating that Americans feel worse off today compared to the recent past, so much so that many of them indicate that the economy is currently in recession, that the rate of unemployment is the highest in several decades, that inflation is very high today, etc. It is as though Americans have been hit by an incoming train, heads on.

The truth is that things have been improving. But for many Americans, current economic conditions continue to be worse than before the pandemic. Inflation is probably one of the reasons why Americans are feeling worse today. But it is not because inflation is still high—it is not. The problem is that the price level—which is not the same as the rate of inflation—is much higher today than it was before the pandemic. But so are wages and salaries.

Still, the stress felt by many American families is both understandable and real. Think about it, for several decades American families were used to shopping without even considering what was happening to prices because the change in prices—that is, the rate of inflation—was so low that we did not spend much time trying to figure out when, where, what, and how to buy goods and services. However, because prices increased so fast and by so much over the last several years, a typical American family has had to search and consider several alternatives to spending their hardearned income. This search process is, sometimes, very stressful. How stressful, you may ask? For many families, making a bad purchase decision could mean not being able to make ends meet.

Furthermore, higher inflation not only affects our ability to buy goods and services, but it also affects relative prices. That is, the price of one good compared to the price of a different good because not all goods/services prices in the economy increase at the same rate.

At the same time, from the income side, something similar has happened. Although many wages and salaries have increased to catch up to the higher rate of inflation over the last several years, not everybody has been compensated the same way. Some income earners have fallen behind since inflation started to accelerate; and, although almost every income earner has seen an improvement in real terms (adjusted for the effects of inflation), not everybody is sharing this improvement equally.

The graph below shows real wages and salaries for private industry workers in goods-producing and service-providing industries1. For most of the first decade and a half of this century, real wages and salaries were relatively stable—not better, but not worse. This changed in 2014 when we started to see a strong upward movement in real wages for both, the goods-producing as well as the service-providing sectors.

This process ended after the pandemic due to fundamentally higher inflation. However, as the graph shows, the deterioration in real wages and salaries for both sectors ended during the third quarter of 2022 when the Federal Reserve’s increase in interest rates as well as the normalization of supply chains, started to affect the rate of inflation and the disinflationary process started. Since then, real wages and salaries have been increasing though are still below the pre-pandemic levels (but higher than the pre-2014 levels).

This is probably one of the reasons why Americans feel that the economy is in bad shape, because the purchasing power of wages and salaries is still not back to the levels that existed before the pandemic.

But not everybody is worse off today. Some of the workers whose return to the labor force was more difficult because they had to deal with daily contact with the public have fared much better than other workers. Workers in retail trade, accommodation and food services, and in the leisure and hospitality industries, among others, have either kept their real wages intact or have become net beneficiaries of the current economic environment.

Other sectors of the economy; however, have not been so fortunate and have yet to recover their purchasing power compared to pre-pandemic levels as the graph below clearly shows. Regardless, almost every sector of wage earners has seen an improvement in their real wages and salaries as inflation has subsided—even if they have not recovered completely.

But it is true, many Americans are still worse off today than before the pandemic recession even if the economy has continued to surprise to the upside. Thus, both concepts are not mutually exclusive. In other words, the economy is still in good shape, even though Americans are still feeling unhappy!

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