Economics affects everything, and now that it’s election season, talk about jobs, tax policy and the economy generally has likely come across your feed.
Although the country seemingly avoided a recession last year, that doesn’t mean that everyone is happy with the state of things. As we’ll see, some of that sentiment is justified, at least as it pertains to some elements of the economy.
“The people’s perception is that the economy is not doing well,” said Dr. Abdullah Al Bahrani, an economist and associate dean with NKU’s Haile College of Business, “which has implications, because in economics, we have this idea that the economy or consumer sentiment can create what’s called a self-fulfilling prophecy.”
Al Bahrani delivered these remarks to the Latonia Business Association last week. In addition to his academic work, Al Bahrani spends a lot of time out in the public discussing economics, and he publishes a regular newsletter explaining economic concepts to the layman.
“I’m a big advocate in understanding financial literacy and economics,” Al Bahrani said. “I believe that it is the best way for us to influence change by having a better understanding of the economics that influence our lives. So that’s my calling in life.”
Al Bahrani pulled data from multiple government and academic sources to paint a picture of the current economy and people’s attitudes toward it. As it relates to consumer sentiment, he cited the University of Michigan’s consumer sentiment index, which assigns a numerical value to people’s feelings about the economy, independent of other economic metrics.
A value of 100 or above indicates positive sentiment, and values below 100 indicate a poor sentiment. As of the end of 2024’s first quarter, American sentiment is down to a value of about 68. The previous peak of 101 occurred just before the pandemic.
Does this comport with other economic measures? Well, yes and no…
Some metrics are doing well. The country’s gross domestic product, or GDP, is continuing to grow. GDP measures the country’s value of goods and services produced and is often used to gauge general economic activity. The nation’s real GDP growth–that is, GDP growth adjusted for inflation–has been increasing for about 14 quarters. The nation’s real GDP growth year-over-year at the end of 2024’s second quarter was 3.1%. Kentucky’s was 2.8%.
This measure suggests increased economic activity, but it’s a very broad, aggregate measure. Increases in GDP may not be discernible in the lives of individuals.
Inflation has also slowed in recent months; down to 2.4% as of the most recent measures from the Consumer Price Index, “a big decrease from the 9.1% that we felt in 2022,” Al Bahrani said. The Federal Reserve aims for about 2% annualized inflation as a healthy metric, but there are some caveats to the 2.4%.
Much of the decrease has come in the form of gas and food, but if you remove the energy and food measures from the index, the inflation rate for everything else is closer to 3.3%.
It’s important to remember that inflation doesn’t measure absolute prices, it measures the rate at which prices increase. Once a price has increased, it takes a lot to make it go down again, and broad price decreases, or deflation, can actually be an indicator of a recession.
Yet, even if the rate of increase is slowing, prices for everyday essentials since the beginning of the pandemic have seen precipitous increases. At the same time, average weekly earning rates adjusted for inflation, while they’ve still gone up, have not kept up with accumulated inflation rates of essentials, only increasing about 1.5% since July 2019.
Moreover, the average weekly earnings adjusted for inflation for people living in the Cincinnati Statistical Area, which includes Northern Kentucky, have actually declined since 2019.
There has been some income growth, Al Bahrani said, but “most of the growth has gone to the top 1%.”
Housing sale prices have also continued to increase, even when adjusted for inflation. This is especially important, Al Bahrani said, as property ownership is one of the primary mechanisms by which people accumulate wealth in the United States. So if housing prices are prohibitively high, fewer and fewer people will be able to accumulate wealth for themselves and their families.
In other words, in spite of the continued GDP growth and slowing inflation, much of the American consumer’s purchasing power has declined, and this decline is likely the source of the negative sentiment around the economy.
In spite these problems, people are still spending money, which has been keeping the overall economy afloat. It’s much harder to save in today’s economy, but credit card and mortgage delinquencies are low in historical terms, even if credit card payment delinquencies have been rising for about 10 months.
The job market is also a bit of mixed bag. Unemployment rates are within acceptable rates, Al Bahrani said, between 4.5% to 5 %. Kentucky has also seen a healthy rate of job growth. There are, in fact, currently more jobs available than people; there are about 0.7 workers available for every job opening in Kentucky. Yet, that job opening measure does not account for wage distribution (it includes everything from minimum wage jobs to CEO positions). Additionally, hiring levels nationwide are well below the number of job openings.
Finally, most stock markets are performing well, largely as a result of continued consumer spending, which has remained persistent, in spite of the hit to people’s wallets.
“If you have your money in the stock market, you’re feeling good,” Al Bahrani said.
In short, while many of the worst conditions induced by the pandemic have passed, the average consumer and worker in the United States is likely still feeling a squeeze. In Al Bahrani’s view, that’s when financial literacy is most important, as it can help guide people through tight times.
“The worry that we [economists] have at this point is if this negative sentiment continues, it will impact retail spending,” Al Bahrani said. “It hasn’t drastically yet, but it might do that, and that will then lead us to a recession. So one of two things needs to happen: People either need to believe the economic data that the economy is good in some parts, or we need to make people feel better about the economy. I don’t know which one comes first, but that’s the problem here because if we allow this consumer sentiment to remain, it can impact actual data.”
Check out Al Bahrani’s newsletter below. Al Bahrani will also be giving a free, public lecture on economics and the upcoming election on Monday, Oct. 28 at NKU’s Student Union, which you can RSVP to attend below.
Join us next week for a new edition of Northern Kentucky By the Numbers.