In recent months, as economic indicators of the health of the US economy have improved, public sentiment about the economy has continued to decline. Investigating this gap between perception and economic reality, Stuart Soroka and Christopher Wlezien write that the public may be responding to indicators not just about the past and current situations, but also about the economic future – many of which have been trending downwards.

Much attention has been paid to the apparent gap between economic reality and public perceptions in the United States. As economic conditions have improved – unemployment is relatively low, growth is steady, and inflation is easing – the public has remained pessimistic. To illustrate, Figure 1 plots lagging economic indicators from The Conference Board, a non-profit think tank, along with public perceptions of past and future business conditions from the University of Michigan’s Survey of Consumers.

Figure 1 – Economic indicators and public perceptions

Note: Perceptions are focused on “business conditions” rather than personal finances, since the latter tend to be less connected to national economic indicators

In Figure 1, perceptions of both the economic past, what sometimes are referred to as “retrospections,” and economic future, also known as “prospections,” have tracked downward, even as lagging indicators have tracked upwards. The downturn is greater for prospections but is apparent for retrospections as well, providing what appears to be the basis for claims of a disconnect where the economy is moving one way, and the public is moving in another. At the very least, perceptions of the recent past have not improved compared to where they were two years ago, even as they have improved over the past 18 months but remained net negative. Prospections show a similar trend over time, though they track higher, by about 13 percentage points, reflecting a general tendency over the full time series.. People appear to be more positive about the future than the past.

Why is there a disconnect over the economy?

Perhaps not surprisingly, one suspect is an overly pessimistic media, but there are others. Before searching for suspects, we want to interrogate the inference of a disconnect, which presumes that the public’s expressed perceptions are only about conditions in the past and/or present. Our previous research with Dominik Stecula suggests otherwise, however.

That work indicates that when asked about previous economic conditions, the US public tends to respond to leading economic indicators (including manufacturing hours, unemployment insurance claims, manufacturers’ new orders, new housing permits, stock prices, interest rates, and consumer expectations themselves) designed to gauge the economic future. A follow-up article finds that much the same is true in Canada and the United Kingdom. Across multiple countries, then, public economic sentiment tends to be substantially future-oriented.

Whether public sentiment reflects media coverage is another issue. Our previous work finds that media coverage tends to follow public perceptions more than it leads them, which may be pertinent to the current economic environment. That is, negative media coverage may be less about bias in that reporting and more about negative public sentiment itself.

Photo by Chris Briggs on Unsplash

What is driving negative economic sentiment?

Identifying the drivers of that negative public sentiment is complex, to be sure. Indicators of the past, present, and future economy all are correlated, after all. This can be seen in Figure 2, which plots lagging indicators (as in Figure 1) along with coincident and leading indicators, also from The Conference Board. For this figure, we go back to 1978, which makes clear(er) that the different indices trend upward together over time. While there is common movement among the indicators, they often diverge. Most importantly, when they do, statistical analyses reveal that people’s retrospective perceptions tend to reflect changes in all three indicators, particularly those pointing to the economic future.

Figure 2 – Economic indicators over time

The focus of public responsiveness may have consequences in the current economic environment, where leading economic indicators have moved in a very different direction to coincident indicators and especially lagging ones. To see this, a panel in (the lower right quadrant of) Figure 2 zooms in on the period since January 2022. There the divergence is very clear: whereas lagging indicators – and coincident ones, if to a lesser extent – have trended upward over the last two years, leading ones have trended downward, and dramatically so. Given our research showing that the public responds to leading economic indicators more so than lagging or coincident ones when forming their perceptions, the disjuncture(s) in Figure 1 should come as little surprise. Indeed, given our analyses, the trends in the indicators in Figure 2 should lead us to expect negative perceptions of economic conditions during the period, much as we see in Figure 1.

We are not contradicting the claim that the public’s economic perceptions do not reflect recent economic reality, of course. The two are very different and trending in different directions, after all. We simply want to make clear that the trends in economic perceptions may be understandable given that the public responds in large part to indicators of the economic future, and those indicators have been trending downwards. Of course, readers may wonder why public perceptions tend to be oriented in this way. The answer is not clear at present, but we need to remember that while survey organizations get to ask the questions, respondents get to answer them, using whatever information that they consider to be relevant. For whatever reason, people tend to reflect forward-looking indicators in addition to backward-looking and coincident ones when evaluating current economic conditions. The combination of those indicators helps account for the patterns we observe, even if only incompletely. We also noticed that data released last week registers a big jump in public sentiment. Whether a trend emerges remains to be seen, of course, and could have real consequences, including for the election in November.

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