60% of Americans still don’t buy the strong economy narrative

The majority of Americans believe the economy is in a recession, even though economists argue that this is not the case.

According to a new survey of 2,000 adults conducted by Affirm, roughly three in five Americans believe their country is currently in a recession, which is typically defined as back-to-back quarters of negative growth.

Most of the recession-weary respondents think the downturn started about 15 months ago, just before the national unemployment rate began to creep higher.

U.S. GDP has been on the rise since the start of 2023, though growth slowed to a crawl in the first quarter of this year. While growth remains positive, stubborn inflation is distorting Americans’ view of the economy, said Vishal Kapoor, Affirm’s senior vice president.

“With confidence in the U.S. economy at a low point, consumers are urgently seeking ways to feel in control of their finances,” Kapoor said.

It’s hard to feel in control of personal finances when the cost of groceries alone has soared 26% since the start of the pandemic. Inflation has been so bad that many Americans view it as a bigger problem than an outright recession.

According to Minneapolis Fed President Neel Kashkari, Americans “really viscerally hate high inflation.”

The Fed’s inflation-recession conundrum

In 2022, the Federal Reserve responded to inflation by raising interest rates 11 consecutive times, bringing the federal funds rate to 5.5%—the highest in more than 20 years.

It took longer than expected, but it’s now clear that the Fed’s monetary policy is working to cool inflation.

The problem is that many economists think the Fed has kept rates too high for too long, opening up the real risk of a recession. In June, Queens’ College president Mohamed El-Erian said the Fed’s negligence had raised the risk of a recession to 35%.

Those odds likely increased when the Institute for Supply Management reported in July that the services sector contracted at the end of the second quarter. In fact, service output registered its biggest drop in four years.

That's a big problem because services account for more than three-quarters of the U.S. economy.

According to the Conference Board’s latest forecast, the Fed’s stubbornness on interest rates is expected to continue to sniffle economic growth.

“The U.S. economy is expected to continue to lose momentum near-term as high prices and elevated interest rates sap domestic demand,” the Conference Board said in a July 11 update.

“While we do not forecast a recession in 2024, we do expect consumer spending to cool further and real GDP growth to decelerate to around 1% quarterly annualized in Q3 2024.”

Economists at Citigroup are more pessimistic, claiming the Fed will need to cut interest rates aggressively to avoid a steeper economic downturn.