What solace can US policymakers take from public opinion?

>> Two scenarios for the US economy

To see this, just consider a recent poll of US public opinion from the global market research firm Harris. It found that 56% of respondents currently believe that the US is in a recession. Some 49% believe that stocks (the S&P) have fallen this year. Almost three-quarters (72%) think that inflation has increased over the past year and 49% believe that unemployment is near 50-year highs (it is near 50-year lows). What does this tell us?

Cynics would say that it shows that most Americans don’t watch the news. But surveys don’t ask what has happened to inflation in the past year, as some sort of observation test on the CPI data, but instead, what do you feel that inflation has done over the past year. The former question tells us nothing about public opinion; the latter tells us everything.

The first point to make is that it is certainly not unusual for public opinion to be out of sync with the flow of economic data. The second point, for policymakers. is that the public can still be quite pessimistic even if the actual data seem quite solid. That’s of particular importance to the Biden administration ahead of November’s election.

And any thought that pessimism about growth and inflation are a matter of partisanship should be dispelled by the fact that the Harris poll shows that some 49% of Democrat-supporting respondents think the economy is in recession and 61% believe that inflation has increased over the past year. These are lower than the total figures, which shows that there is some partisanship in the responses, but we think it is hard to use this as an excuse.

In short, the economy might be doing quite well, but people, from all political persuasions are not feeling it. Why is this? Steve Barrow, Head of Standard Bank G10 Strategy, said public opinion on the economy is dominated by the one thing that everyone can clearly judge, which is the price of the goods they buy. People can’t really judge accurately whether an economy is strong or weak or whether the labour market is loose or tight.

Their opinions are likely to be based on their own individual experiences, such as the ease of getting a new job, but this can vary significantly from state to state, from town to town, and from industry to industry. Prices, on the other hand are more uniform, not least because many prices are set by firms that have a nationwide presence.

>> What is the US consumer confidence index showing?

Note also that we said prices are the key; not inflation. That’s probably why, after a big burst of inflation, the public still sees prices as high even after the rate of inflation slows down. On a political level, this looks a major problem for the Biden administration for, even if inflation falls to target, and even if this prompts pre-election rate cuts, the public may still view prices as high and punish Biden in the voting booth. We could argue that it is also a problem for the Fed. For instance, the Fed argues that inflation expectations are anchored, but is this really the case?

Another problem is that poor public opinion about the economy might reflect the fact that much of the actual strength in the economy is accruing to a relatively small group of people. For instance, the level of household assets is very robust right now, but if this is disproportionately geared to stock market strength then it might only benefit higher-income families and mean that surveys across all income groups don’t share in the optimism.

“So here are just two arguments for the Fed to think about that could suggest that rates are either too low or too high. But while the message for the Fed is debatable, the one for Biden is unequivocal. It is that declining inflation and perhaps even rate cuts might not bring the bump in the opinion polls that Biden seems to need to feel confident about the November election outcome. If Biden cannot feel confident, neither can the financial markets, and that might make for huge uncertainty ahead of, and straight after, the November 5^th election. Perhaps it is little wonder that another survey just recently suggests that firms are taking out longer FX hedges in order to try to avoid any election volatility”, said Steve Barrow.