Perceptions of the economy

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NPR's Scott Simon speaks with Bloomberg economics reporter Amara Omeokwe about the disconnect between economic numbers and consumer sentiment.

SCOTT SIMON, HOST:

There's been some great economic numbers in the last two weeks - 254,000 new jobs in September, plus consumer prices only rose 2.4%, the smallest increase in 3 1/2 years. But tell that to many Americans, and they'll say, hold on a minute. Amara Omeokwe reports on the U.S. economy and the Federal Reserve for Bloomberg. She joins us now. Amara, thanks so much for being with us.

AMARA OMEOKWE: Thanks for having me.

SIMON: What's the data say?

OMEOKWE: Well, the data says that overall the economy is in pretty good shape. As you mentioned, we still have a solid pace of job creation, and inflation has come down from those very high levels that we saw earlier in the pandemic recovery. But people kind of have a reference point in their mind of what they think they should be paying for the things that they want and the things that they need, and prices are still very high compared to where they were pre-pandemic, and they're not likely to go back to those pre-pandemic levels. So I think that's part of what drives some of the negative sentiment that we see out there.

SIMON: And you hear from consumers, don't you?

OMEOKWE: I do hear from consumers in my reporting, and that's definitely one thing that they mention. And then the other thing that we often hear is what is happening out there with the cost of borrowing, right? So part of how we've had this slowdown in inflation is what the Federal Reserve did to address inflation. They raised their key interest rates to the highest level in more than two decades to kind of pull demand out of the economy, to cool the economy down. But raising rates to that level also raised borrowing costs for mortgages, credit cards, car loans. And so people are also feeling the effect of that as well.

SIMON: Do we look at the wrong numbers to tell us how the economy is doing, or at least do we look at numbers that economists rely on, but not people who have to pay for groceries?

OMEOKWE: Yeah, I think one big thing that people think about is that reference point, right? So economists pay a lot of attention to inflation, the rate of change in prices. And that has really calmed down from where we were in 2021 and 2022. But if you look at just the absolute price of a lot of things that people need - groceries, things like that - the price is just really high. And I think people also pay attention to their wage gains. And coming out of the pandemic, we had very strong wage growth because, as you may remember, employers were basically fighting one another to find workers. There was this big worker shortage, and so they were offering big pay raises. But as we've gotten farther into the pandemic recovery, those wage gains have started to slow. And we also have seen the labor market overall cool off. And so I think in the consumer sentiment data now, you're starting to see people sort of noticing that, that the labor market isn't as hot as it was earlier in the pandemic recovery, and you see people in the data starting to talk about that.

And so you also saw the Federal Reserve respond to that, right? So they had been holding interest rates at this high level, but they started to also get a little apprehensive about the cooling in the labor market. And so that's why we saw the Fed come out in September and cut rates by a larger-than-usual half-percentage point because once you see the labor market really start to slow down, it can really result in higher levels of unemployment and pain for people throughout the economy.

SIMON: Are there numbers we should be looking at in addition to the ones that we usually cite?

OMEOKWE: Economists, when I'm talking to them in my reporting, often say, you know, watch what people say, but also watch what people do. And when we look at consumer spending numbers, actually, those have held up very well. And so even as we've had the Fed hold interest rates at this high level, even as we've seen the labor market cool down, we haven't seen spending fall off a cliff. So even though the sentiment data isn't that positive, we're still seeing people in their behavior still spend and still send a signal that overall the economy is doing OK. There are signs that among lower-income Americans, there are signs of stress. So we've seen increasing levels of credit card delinquencies, which says that people at the bottom of the income distribution are maybe feeling a little stress that people in the middle and higher levels of income aren't necessarily feeling. So I think that's also important to note, that often economic data is talking about aggregates, right? But when we drill down onto some of those deeper levels, you can see signs of stress for some Americans.

America's middle class, traditionally considered the backbone of the nation and its economic engine, has been shrinking for the past 50 years, according to a recent Pew Research Center survey.

A study based on government data released by the Washington-based nonpartisan fact tank in late May found that the share of Americans living in middle-class households dropped from 61 percent in 1971 to 51 percent in 2023. During the same time, the share of Americans living in lower income households rose from 27 percent to 30 percent, while that of individuals living in upper income households rose from 11 percent to 19 percent.

The findings show us that the wealth gap between Americans has grown deeper in the past decades, exacerbating inequality. While households in all income tiers had much higher incomes in 2023 than five decades before, the income for upper-income households has grown at a much faster pace than that for the middle class since the 1970s.

"It is now over a decade since President Obama called the growing inequality in the United States the defining challenge of our time, reflecting both a reading of economic developments over the course of the last four decades, and offering a forecast of the threat posed to the lives of Americans and of its democracy," Miles Corak, professor of economics at the Graduate Center of the City University of New York, told Newsweek.

"America is a much more prosperous society than it was in the 1970s and 1980s, and even more prosperous than just a decade ago, in spite of recessions and pandemics," he continued.

"But it is also more polarized, with an ever-increasing share of income and wealth going to the top, as the Pew report documents, an ever-increasing insecurity among the middle, and a declining share of income and a less hopeful future for those at the bottom."

The Pew Research Center defines middle-class Americans as those living in households with an annual income that is between two-thirds and twice the national median household income. The income can vary according to household size.

The median income of middle-class Americans has risen from $66,400 in 1970 to $106,100 in 2022—a 60 percent growth. While this is an incredible improvement, during the same five decades the median income of upper-income households rose by 78 percent (from $144,100 in 1970 to $256,900 in 2022). Lower-income households saw an increase of their median income of 55 percent (from $22,831 in 1970 to $35,318 in 2022).

Crucially, the share of total U.S. household income held by the middle class has also dropped since 1970. By then, the American middle class held 62 percent of the aggregate income of all U.S. households; now they account for 43 percent only. While the share held by the lower-income households has remained relatively unchanged (from 10 percent to 8 percent), the upper class has grown its share from 29 percent to 48 percent.

Migrants, some 14 percent of the country's population, were less likely than U.S.-born residents to be in the middle class and more likely to be living in lower-income households.

For Corak, these findings ring an alarm bell over the future of the U.S. economy.

"A prosperous but also a fully inclusive society is what America needs, with a hopeful and resilient middle class at its core. A prosperous resilient middle class is the backbone of an inclusive society," Corak said.

"The middle class supports consumption, drives investment—both in the market place and in communities—and is the foundation for social protection, strong communities and a helpful public service," he added.

"The OECD, in a 2019 report, stated that societies with 'a strong middle class have lower crime rates, they enjoy higher levels of trust and life satisfaction, as well as greater political stability and good governance,'" Corak said.

"The fact that the American economy continues to generate prosperity with polarization should be as much a worry to us now as it was a decade or even more ago," he added.

According to Corak, America's middle class can only make a comeback "if workers and working families have more bargaining power in the way wages are set and work organized; if poverty and particularly poverty among children is held in check and lowered by economic growth and by effective and generous government support; if all groups regardless of race, gender and ethnic background have the opportunity to fully develop and profit from their talents and energies; and if the rich pay their fair share in taxes."