Economist and Nobel laureate Paul Krugman weighed in on Monday on data that highlighted Americans’ optimism about their personal financial situations a year ahead.
What Happened: The New York Federal Reserve released the results of its consumer expectations survey for January on Monday, revealing that the percentage of consumers expecting their financial situation to improve — either much better or somewhat better — rose from 30.6% in December to 34.1% in January. This marked the highest level since March 2020, when the COVID-19 pandemic began.
Source: NY Fed
Responding to data shared by Wall Street Journal chief economics correspondent Nick Timiraos on X, Krugman said, “Beat me to it. People saying Americans aren’t feeling economic improvement are well behind the curve.”
Timiraos also noted in his post that the percentage of respondents finding it harder (somewhat harder/much harder) to manage fell to its lowest level since May 2022. In January, this percentage stood at 43.6%, down from 46.8% in December 2023 and 51.7% in January 2023.
See Also: Best Inflation Stocks
Why It’s Important: Consumer perception of economic conditions is crucial because consumers drive the bulk of economic activity, with their spending accounting for two-thirds of GDP. Despite the series of rate hikes since March 2022, the economy has remained resilient largely due to consumers’ continued spending on goods and services, even as real income levels fell amid job cuts and inflation. Consumers have compensated for income shortfalls by dipping into savings and relying on credit.
Improvements in consumer perceptions regarding inflation, household finances, and credit availability, therefore, bode well for the economy.
One primary reason President Joe Biden trails behind Donald Trump in opinion polls is due to Americans’ poor approval ratings for his handling of the economy. It remains to be seen if the improving consumer morale will bolster his re-election prospects.
That said, a section of economists contend that the economy is not yet out of the woods. They argue that the lagging impact of the rate hikes will likely return to haunt the economy. Inflationary pressures, though contained, remain above the central bank’s target, preventing the Fed from lowering the key rate from its 22-year high. Another area of concern is the U.S. debt pile, as the federal government is living well beyond its means.
Photo via Shutterstock