Americans Are Starting to Feel the Economic Recovery

February 1, 2024

The index of American consumer sentiment about the economy rose to 78.8 points this January, its highest level since July 2021. The 28.5 percent gain over the past two months represents the greatest improvement in consumer sentiment since March 1991, and suggests that Americans are starting to feel like the economy is back on track. Policymakers must now stay the course and continue to deliver broad and sustained improvements in economic conditions in order to carry forward public opinion.

In November, policymakers expressed concern amid reports that most Americans have unfavorable views of their economic well-being despite a booming national economy and slowing inflation. The reports were misconstrued, suggesting that policymakers were out of tune with the electorate or that the economy hadn’t actually recovered.

But low levels of consumer sentiment were easily explained by the stickiness of recent economic conditions. The pandemic recession led to sustained negative economic conditions for about two years, and Americans needed time to recover after the conditions abated. Core inflation peaked at 6.6 percent in September 2022, reflecting broad price increases that have declined gradually since then—reaching 3.9 percent in December. From March 2022 until July 2023, the Federal Reserve undertook 11 interest rate hikes that raised rates by 5 percentage points, drastically increasing the cost of borrowing money on credit. Lastly, Americans have only experienced broad real wage growth since March 2023, when nominal wage growth outpaced inflation for every quartile of the wage distribution. This ended two years of purchasing power decline from real wage growth erosion.

Americans’ economic sentiment is not a direct reflection of existing macroeconomic conditions. Rather, consumer sentiment tries to capture how Americans feel about the economy and where it’s headed. This means that in order for consumer sentiment to improve, Americans must experience economic conditions that both restore their economic well-being and instill optimism about future economic gains.

For example, five years after the global financial crisis struck in 2008, a Pew Research Center survey found that 63 percent of Americans saw the US economic system as no more secure than when the crisis struck. Similarly, economic sentiment for September 2013—when the Pew survey was conducted—was declining, and about 70 percent of Americans viewed the federal government as doing too little to help them. For most Americans, the sluggish recovery from the Great Recession did not lead to a significant improvement in economic well-being and instilled pessimism about the economy’s direction.

Conversely, American sentiment is on the rise just four years after the pandemic struck and less than two years after inflation peaked. At the core of this rise are the broad, marked improvements in the ability of households to thrive in the economy—the direct result of successful economic policies enacted after the pandemic, such as the American Rescue Plan. But for these policies, Americans would be expressing similar sentiments to those captured five years after the Great Recession.

Building on two consecutive months of consumer sentiment growth requires that policymakers continue to deliver improvements in economic conditions for Americans. While the lingering effects of the pandemic have receded, emerging economic challenges will continue to require policies that actively promote improvements in economic security. This means that the work of policymakers is not complete, and much effort is needed to sustain real wage growth and control consumer prices.