Inflation has been eating into the wage gains of ordinary Americans for more than a year, souring them on the economy. Now, the wealthy are just as pessimistic.
Consumer sentiment has plunged to levels not seen since the 2008 financial crisis, down more than 40 percent over the past 12 months, according to one closely watched survey. Another poll found that the number of people who feel positively about the economy has dropped 20 percentage points since September — driven down by wealthier people who had thrived during the pandemic as the stock market boomed.
The cratering of optimism across all income groups — even as the economy is churning out jobs and growing — is bleak news for Democrats as they head into the midterm elections, with the data underscoring that there are few pockets of voters who aren’t feeling the misery of rising prices in everything from food and shelter to airline tickets. The stock market's slide this year has spread the pain to all income groups, with the benchmark S&P 500 Index tumbling nearly 4 percent on Monday alone.
“The instability of the market has rattled both the wage payer and the wage earner,” said Kevin Madden, executive vice president of advocacy at Arnold Ventures and a veteran Republican strategist.
With Federal Reserve policymakers meeting this week, that mood is bound to darken even more as the central bank continues its campaign of aggressive interest rate increases designed to combat inflation by raising borrowing costs and slowing economic growth.
Joanne Hsu, director of the influential University of Michigan consumer survey, which last week hit record lows, said there has been a precipitous drop in sentiment among the top third of income earners. Typically, people who make more money feel better about the economy. But in the first half of the year, feelings among all income groups converged as share prices began experiencing heavy declines — shrinking financial buffers for wealthier Americans.
Some 90 percent of the value of stocks owned by households are held by the wealthiest 10 percent of Americans, according to Federal Reserve data.
“It’s basically impossible to ignore” that inflation has broadened out across sectors, Hsu said. “We had strong stock market performance up until the beginning of this year.” The S&P 500 has declined more than 20 percent this year.
Inflation has also caused income to shrink for many people in higher brackets. Some low-wage workers as a group have seen their take-home pay increase as employers face fierce competition for labor in sectors like retail and hospitality, but price spikes disproportionately hurt lower-income people whose spending is less discretionary.
The result: No one is feeling great about where things stand, even as the unemployment rate sits near modern-era lows at 3.6 percent and many people continue to spend heavily.
“Nobody’s going to say it’s a good economy” while inflation is elevated, said Claudia Sahm, a senior fellow at the Jain Family Institute and a former Federal Reserve economist.
Higher-income people weathered the worst economic impact of the pandemic much better than those who earned less; almost 40 percent of workers in households making less than $40,000 lost their jobs in March 2020. Wealthier Americans enjoyed a soaring stock market and saw their savings balances rise more than a third over pre-pandemic levels, according to data from the JPMorgan Chase Institute.
“High-income consumers didn’t experience a pandemic recession in the same way as low-income consumers,” Hsu said.
But the sentiment tide began to turn last summer when inflation picked up. A poll this month from Global Strategy Group found that among voters making an annual salary of between $100,000 and $400,000, the number who described the economy as doing well fell by half since September. A big culprit? Market turmoil.
Richer voters were much more likely to cite stocks as the best way to judge how the economy is doing than those making less, the poll found. Forty-five percent of those earning more than $400,000 a year cited the market as a top indicator; 22 percent of those making less than $30,000 a year said the same.
“A lot of investments were made under the assumption that inflation would be low, and interest rates would be low for a long [time],” Columbia Business School Professor Kairong Xiao said. “Unfortunately, we now know that this won't be the case. Inflation is approaching double digits, and the Fed has to really tighten monetary policy pretty aggressively.”
For some corners of the job market, low unemployment is helping weather the inflation storm. The Atlanta Fed found that median hourly earnings for job switchers were up 6 percent over the last year in May — a full 1 percentage point more than the overall average.
“When people feel really, really squeezed in every other market, [the] labor market is the one market where the odds are in their favor. And it's the one market they're kind of relying on to solve all their other problems,” said Julia Pollak, chief economist at ZipRecruiter.
But much of that growth is concentrated in lower-income industries — meaning that higher-income workers are less likely to be able to rely on burgeoning paychecks to counter the pain of larger price tags.
Those in the lowest quarter of average wages saw their pay increase by 6.7 percent over the last year in May, according to the Atlanta Fed. Those in the highest quartile of average wages saw their income go up by about half as much, or 3.6 percent.
“If inflation is helping to keep the labor market tight, and the tight labor market is helping to raise wages at the bottom, low-income people may be better off as a result,” said Marc Goldwein, senior vice president and senior policy director at the Committee for a Responsible Federal Budget.
Still, he said, “high inflation … isn’t good for anybody.”