Why do so many Americans wrongly think the US is in a recession?

WASHINGTON: Fears of a recession in the United States are fading and its finances are in surprisingly strong health – but Americans are not buying it.

US President Joe Biden continues to be dogged by low approval ratings over his handling of the economy, despite its expansion by 3 per cent last year. Unemployment has also fallen.

Economists have described this disconnect as a “vibecession”, where confidence in the economy is at stark odds with the actual data. Some believe it could be because Americans are still feeling the impact of high interest rates.

A key US inflation report, the Personal Consumption Expenditures Index, will be released on Friday (May 31), indicating whether the US Federal Reserve is ready to cut interest rates for the first time since the pandemic.

A poll for the Guardian newspaper published last week showed that nearly three in five Americans wrongly believe the US is in a recession and that the economy is shrinking – and the majority blame the Biden administration.

Biden is looking to stay in the White House in the upcoming US presidential election, set to be held on Nov 5. His predecessor Donald Trump is also running for re-election.

Such a robust financial environment would historically help to carry an incumbent US president to a second term in office, but this does not seem to be the case now.

“THEY THINK THAT IS A HIGHER PRICE”

Harvard University economics lecturer Judd Cramer said that “vibecession” is the idea that the economy is doing quite well, but the vibes – or what the people are feeling – are “not where we think they should be”.

The economist, who co-wrote in a paper in February analysing why this could be happening, told CNA: “The measures that we traditionally use to describe whether we’re in a recession or an expansion, those are all in great shape.

"Unemployment is low, inflation is declining. GDP (gross domestic product) growth has been doing well.

“We would have expected that given those things, consumer sentiment would also be rising. But we haven't seen that to be the case at all.”

Cramer noted that this could be partly due to elevated interest rates, which have in turn caused mortgage and credit repayments to go up.

However, mortgage payments and interest costs are not included in official measures of inflation.

“They think that that is a higher price in the economy, and they experience that as more inflation,” Cramer added.

The Federal Reserve began hiking rates in March 2022 and has raised them 11 times since then. Currently, rates are at their highest levels in two decades at 5.25 to 5.50 per cent.

RATES NOT LIKELY TO COME DOWN BY MUCH

With the presidential election just five months away, Democratic lawmakers said the perception gap is proving to be a challenge on the campaign trail. 

Trump has also been painting a bleak picture, saying that nothing has been cheaper under Biden.

In response, the Democrats have pointed to job creation, student debt relief and reduced prescription drug prices. But the central bank is not expected to lower interest rates much, if at all, by November's election.

As families continue to feel the pinch, the Biden campaign could struggle to convince Americans that the president’s handling of the economy is worth their vote.

“I think you can't tell folks how they feel because they feel the way they feel. I think you can say we've still got work to do,” said Representative Ami Bera.

“There’s certainly a hangover from the pandemic, I think, and we're still trying to shake some of that off,” he added.

“A lot of folks are doing better when you ask them about their personal life …But when you ask, how's the country doing? They still see a lot of turmoil.”