“Of course, the economy is affecting the way I spend,” Steve Mort, an IT manager in Nashville, Tennessee, told VOA.
“I’m prioritizing shorter-distance vacations I can drive to because of the high cost of air travel, and I’m trading my car in less often because it saves money at the dealership,” he said. “I’m making less visits to Starbucks, I’m cooking more at home, and I’m buying cheaper store-brand foods. I’m a lot more conscious of my expenses these days.”
Mort isn’t alone. In a February poll by Gallup, 35% of Americans mentioned economic problems as the biggest concern facing the country today. That number is sizable, but down from a peak of 46% in Gallup’s October survey.
That decline parallels America’s broader worry over the economy — moderating but still present. In that October poll, for example, 20% of respondents listed inflation as their primary concern. In February, that number dropped to 13% of respondents, second to the non-economic issue of government/poor leadership.
“The economy is sending mixed signals, yes, but the economy is pretty much always sending mixed signals,” said Benjamin Friedman, a political economist and professor at Harvard University. “That’s why economic forecasting and economic policymaking are difficult.”
“But I don’t think consumers are affected directly by these signals,” Friedman added. “What matters to them is the economic situation they face — their income and how easy it is to get a job.”
Economic uncertainty
“It’s time for me to contemplate retirement,” said Gary Kohler, a pulmonary critical care physician in the small city of Lake Charles, Louisiana, speaking with VOA. “But how do I do that in such an uncertain economy?”
That uncertainty is confounding economists, as well.
“We don’t have many historical situations like the one we are in now,” explained Harvard University professor of economics David Laibson. “That makes forecasting inflation especially challenging.”
Elevated inflation is still the chief economic concern cited by consumers and economists alike, eroding purchasing power and driving up the cost of living. Inflation as measured by the consumer price index (CPI) hit a 40-year-high last June when prices were 9.1% higher than the year before.
To bring that inflation rate down to the Federal Reserve’s stated target of 2%, they have raised short-term interest rates eight times in the last 12 months. As of January, the CPI rate had dropped to 6.4%. That’s an improvement from last year’s zenith, but still far from the Federal Reserve’s goal.
“The Federal Reserve will keep raising interest rates until there is clear evidence we are near their inflation target,” Laibson told VOA.
That, he said, will slow cost-of-living hikes, giving much-needed relief to Americans whose budgets are already tight. But higher interest rates will also slow down the economy, which Laibson gives a 30% chance of sliding into a recession this calendar year.
“The reason that number isn’t higher is because it reflects a very strong labor market that continues to run hot by any historical standard,” he explained.
That labor market is represented by 517,000 new jobs created in January and a jobless rate of 3.4%, the lowest mark since 1969. Still, according to recent data by Fidelity Investments, the average American worker saw hourly wages fall by 1.8% in 2022 after adjusting for inflation.
“My husband and I feel fortunate to be employed,” explained Whitney Andrus, a nutritional coach in Baton Rouge, Louisiana, “but this economy is so stressful. My kid accidentally broke a window with a rock recently, and it’s knowing these little emergencies can come up that causes me the most worry.”
Andrus said that half of the family’s purchases are “thrifted,” meaning they are purchased used or at deep discounts at thrift stores, garage sales, or flea markets.
In addition, “we’ve had to avoid any kind of vacation planning,” she said. “My husband is in aviation, and we should move to a new city for more opportunities, but that’s too expensive. I want to give my daughter a senior trip, but that’s expensive. All growth plans for my business are on hold. I could really use a little more quality of life without all this stress.”
Recession coming?
Steve Hanke, a professor of applied economics at Johns Hopkins University, served on former President Ronald Reagan’s Council of Economic Advisers and is considered one of the world’s leading experts on hyperinflation. Despite Federal Reserve policymakers’ hopes that they can achieve a “soft landing” for the economy that corrals inflation without causing a recession, Hanke believes an economic recession is likely on the way.
“My forecast is that year-over-year inflation will drop to between 2% and 5% by the end of the year,” he told VOA. “Given the recent contraction in the money supply since March 2022, I think a recession is baked into the cake.”
As his predicted recession comes into focus, Hanke says, business owners and consumers will change their spending habits and hunker down.
Industries largely dependent on loans, such as the housing sector, are already feeling the effects of the Federal Reserve’s decision to sharply raise interest rates.
“During the pandemic, it was a buying and selling frenzy thanks to those low interest rates,” said Rose Ann Miron, a realtor in New Orleans, Louisiana. “More recently, I’ve definitely seen a change.”
“It’s been a bit of a mixed bag.” she said. “Experienced buyers with the resources to pay cash are making up the majority of the buying and selling. My small investors and first-time homebuyers, on the other hand, are definitely holding back in the near term because of high interest rates and economic uncertainty.”
High-stakes decisions
Half of the respondents to a Gallup poll last month said they are worse off financially than a year ago — only the second time in 50 years that such a high proportion responded this way. Similarly, Fidelity Investments reported that the average individual retirement account lost nearly one-quarter of its value last year.
A CBS poll from February found that 38% of Americans expect the economy to be in a recession this year, 24% believe the economy will slow down, 18% believe it will hold steady, and 20% believe the economy will be booming.
“I don’t know about booming, but I’m hoping the economy is headed toward stability,” said Will Plenk, a music teacher in Memphis, Tennessee. “I’m hopeful because the stock market and home prices near me seem to be stabilizing. What I don’t feel so hopeful about is my own place in this economy. My wife and my salaries aren’t keeping pace with inflation, and we just had our first child.”
Until recently, Plenk said he felt confident about his financial situation. He recently received a modest inheritance but said economic uncertainty has made him cautious about how that money is used.
“As teachers, there aren’t moments in our professional lives where we come into unexpected sums of money,” he said, “so this feels like our big chance to make an impactful long-term financial decision.
“Do we buy an investment property despite the interest rates, or do we pay off the mortgage on our primary residence? How much do we put into retirement accounts and college funds versus the stock market? I’m afraid to get this wrong. It’s our big opportunity to save us from feeling the financial worry we feel right now ever again.”
Comments are closed.