Americans are becoming satisfied with less

Big news! Consumer sentiment has roared back to prerecession levels, which means the U.S. economy is …. nowhere near pre-recession levels, actually.

The University of Michigan sentiment index rose to 93.8 in December, which is the best reading since January 2007, when it hit 96.9. Following the 2008 financial meltdown, it fell as low as 55.3. Yet headlines about confidence approaching an 8-year high convey the false impression that all the damage from the recession has been repaired.

It hasn’t. The real story may be that Americans have gradually adjusted their expectations downward and are now satisfied with less. Here are a few key data points showing how far behind we still are:

Real median household income, adjusted for inflation, is still about 5% lower than it was in 2007, according to Sentier Research. Real income has improved a little bit since it bottomed out in 2011, but it dropped sharply during the recession and is still closer to the bottom of the rut than the lip. Forecasting firm IHS Global Insight estimates real household income may not reach new highs until 2019, which would be an astonishing 12-year period of backsliding. This one indicator may be the best measure of middle-class woes, because it captures the debilitating decline in spending power of the typical family.

The unemployment rate was a mere 4.6% in January 2007, and it was only 5% at the end of 2007. Today it’s 5.8%. We do have more people working now, but a much larger portion of them are part-timers, with the number of full-time workers still 2.2 million lower than at the end of 2007. That’s with population growth of about 6% during the last seven years. And the portion of adult Americans who have left the labor force and aren’t even looking for work has soared.

Number of full-time employees in the U.S. workforce, in 1000s

Home values are still about 8% below 2007 levels, according to the S&P/Case-Shiller national home price index. Homes have recovered a lot of the value lost during the housing bust, but many home owners are still grappling with a net decline in household wealth. A roaring stock market has helped some people rebuild wealth, but only about half of U.S. households own stock, and that portion has been declining; for most middle-class families, their home is a greater source of wealth than stocks (or at least it used to be).

S&P/Case-Shiller national home price index

People are down on America. More Americans think the country is on the wrong track now than felt that way before the recession, according to polls by the Wall Street Journal/NBC News and others. Perhaps more telling are Gallup surveys showing trust in government, banks and other institutions has fallen sharply during the last seven or eight years. Americans feel the pillars much of the country is built on are crumbling.

Consumer sentiment is obviously subjective, which means it doesn’t necessarily correlate directly with any given economic indicator. People might feel better as they recover from a scary downturn—if only due to relief—than they do near the top of a long expansion that has bred complacency. Falling gas prices probably explain a lot of the improvement in consumer attitudes, since they represent an expense felt by millions every day and tend to have an outsized impact on consumer psyches. In that regard, consumer attitudes might improve further, as gas prices seem likely to keep falling and the sudden glut in oil markets will also lower winter heating costs for about 6.5 million households.

But part of the improved outlook also probably stems from adjustments people have made in their spending habits, career goals and lifestyle wants and needs. There's scientific research showing that the key to happiness is lowering expectations, and economic conditions during the last eight years have readily accommodated that. Americans became far too dependent on debt leading up to the 2008 crisis, and the comedown was a shock as millions found their credit reined in or, worse, they defaulted and wrecked their credit scores. As debt ratios have come down, the forced cutbacks have been painful for many families. But lower debt levels also force consumers to live within their means, improving their financial stability, which is satisfying in itself. Just ask the Whos down in Whoeville. 

Meanwhile, if we’re feeling better, why ask why? There are worse mood enhancers than cheap gas, plus there’s virtue in taking joy from small things. If the good feelings persist, they might even match actual economic improvements some day.

Rick Newman’s latest book is Rebounders: How Winners Pivot From Setback To Success. Follow him on Twitter: @rickjnewman.