Lead Economic Indicator Points to Increased Pessimism in Financial Situation for Americans

Customers shop for eggs at an H-E-B grocery store in Austin, Texas, on Feb. 8, 2023. (Brandon Bell/Getty Images)

Pessimism among U.S. citizens about the state of the American economy increased in May as they remain concerned about elevated prices, high interest rates, and unemployment.

The May “Index of Consumer Sentiment” by the University of Michigan showed that the economic indicator posted a 13 percent decline after three consecutive months of “very little change.” The 10-point decline in the index “is statistically significant and brings sentiment to its lowest reading in about six months.” There has been a “broad consensus across consumers” with people across age, education, and income groups feeling downbeat, according to the survey.

“While consumers had been reserving judgment for the past few months, they now perceive negative developments on a number of dimensions. They expressed worries that inflation, unemployment, and interest rates may all be moving in an unfavorable direction in the year ahead.”

Expectations of year-ahead inflation increased from 3.2 to 3.5 percent. Long-run inflation expectations saw a marginal increase, rising from 3 to 3.1 percent. Both these inflation numbers are higher compared to their two-year range before the COVID-19 pandemic.

Since April 2021, annual inflation has remained above the three percent level, which is higher than the U.S. Federal Reserve’s target rate of two percent.

Inflation even touched a high of 9.1 percent in June 2022 before declining, with the rate currently at 3.4 percent as of April 2024. Under the Biden administration, the Consumer Price Index (CPI) has risen by over 19 percent.

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High inflation has negatively affected the retirement plans of Americans. According to an April study from Northwestern Mutual, Americans now expect that they need $1.46 million to “retire comfortably,” which is more than 50 percent higher since the onset of the COVID-19 pandemic. In 2020, U.S. citizens only expected they would need $951,000 for a comfortable retirement.

Gen Z, Millennials, and Gen X had the highest expectations at around $1.6 million each. Boomers calculated they would need around $990,000. Meanwhile, the amount of money the average U.S. adult has saved for retirement has dipped by over $10,000 since 2021 to $88,400.

Aditi Javeri Gokhale, chief strategy officer, president of retail investments and head of institutional investments at Northwestern Mutual, said the $1.46 million number is an “all-time high” and blamed it on inflation.

“Inflation is expanding our expectations for retirement savings and putting the pressure on to plan and stay disciplined,” she said.

Many Americans are currently struggling due to high prices. A May 21 survey by Credit Karma found that 80 percent of respondents experienced a “cost of living creep,” referring to the need to spend more money to afford the same amount of goods and services as in the past.

Among such individuals, 66 percent said the creep is holding them back from achieving financial goals, 55 percent have taken on debts and are unable to save money, 36 percent were unable to save for retirement, and 27 percent were not able to afford everyday expenses.

Even though the economy has bounced back in various ways, most Americans “still face a higher cost of living now than they did three years ago,” said Courtney Alev, consumer financial advocate at Credit Karma.

“While higher costs for necessities like rent and groceries likely play a role in people’s sourness on the economy, our study shows that Americans may be most sensitive to the fact that due to higher borrowing costs, their money doesn’t go as far as it once did.”

Inflation Remains Key Election Issue

A May 2 Gallup poll found that the percentage of Americans who listed inflation as the most important problem facing their family reached a new high for the third year in a row in 2024.

This year, 41 percent of respondents listed high cost of living as a top issue, up from 35 percent last year and 32 percent in 2022. Prior to 2022, the highest percentage of people who mentioned inflation as the major issue facing them was 18 percent in 2008.

More than 40 percent of upper-income and middle-income groups cited inflation as the most important financial problem. Among lower-income groups, this number was at 31 percent.

Inflation is a key election issue. While recently speaking to reporters, former President Donald Trump said that inflation in America was “rampant.”

“It is moving at a level like people have not seen. They don’t seem to be able to cut it down. Biden has no control over what is happening. He started it with energy and now it’s taken on a life of its own,” he said, adding that “we’ll get it fixed.”

In a May 21 statement, President Biden said that fighting inflation and lowering costs was his “top economic priority.” While inflation has tumbled over 60 percent from its peak, prices are “still too high.”

The president said his agenda to build two million new homes, taking on “Big Pharma” to lower drug prices, and calling on grocery chains making “record profits” to bring down prices will give American families some “breathing room.”

A May 6 Gallup poll found that people’s confidence in Biden’s ability to manage the economy was low compared with his predecessors, including President Trump.

In President Biden’s fourth year in office, only 38 percent of Americans said he would do the “right thing” for the U.S. economy. This was lower than the 47 percent confidence Americans had during President Trump’s fourth year.