Inflation-weary Americans are increasingly pessimistic about the economy

| Survey

Americans are feeling opportunity slipping away. After a summer of rising gas and food prices, many feel economic conditions are tough and likely to become worse as the war in Ukraine continues to tighten supply chains and a strong job market starts showing signs of deceleration—creating an environment that is taking a toll on the budgets of those with lower incomes.

A growing pessimism is one of the key findings of the fourth semiannual edition of McKinsey’s American Opportunity Survey (AOS), which explores in depth Americans’ perceptions of the current and future state of the US economy—and their place within it. McKinsey worked alongside the market research and opinion-polling firm Ipsos to query 2,010 Americans in fall 2022. The data allowed for a better understanding of how outcomes and perceptions are affected by people’s access to resources, as well as by factors such as gender, age, income, education, ethnicity, urbanicity, and immigration. The breadth and depth of our sample gave timely insights across demographic categories and geographic cuts (see sidebar, “About the survey”).

This article, part of a series, presents the survey’s findings on access to economic opportunity, the steady rise in prices, and the hard budget choices households are facing.

Access to economic opportunity

Americans were slightly pessimistic last spring. A summer of stifling economic conditions has tipped the scales broadly to pessimism. Across every demographic group and metric, Americans have moved toward a negative view. McKinsey’s scores of US economic outlook—scaled from 0 to 200, from low perception of economic opportunity to high perception of economic opportunity, with 100 being neutral—showed a 14-point drop from 99 to 85 in overall economic sentiment compared with a survey of six months ago and an 18-point drop from a survey of a year ago (Exhibit 1).

Americans’ view on access to economic opportunity is increasingly negative.

Unlike previous surveys, the lack of optimism cut across all income levels, genders, and ages, with the sharpest declines among those aged 25 to 34 years old—a group we would expect to be optimistic given they are at the start of their careers and in a relatively job-rich economy.

There is a range of potential drivers that could explain this declining optimism. Those 25 to 34 years old may have historically been saving for and looking to buy a first home.1 Today, that group is seeing interest rates rise to levels not seen in more than a decade.2 As for older Americans, many of them may be on fixed incomes3—facing rising prices for everyday expenses. Even the wealthy, who may have endured shifting economic tides early in the cycle, may be seeing their financial buffer4—a stock portfolio or retirement account—shrink.

Persistent inflation weighs on Americans’ near- and long-term outlook

In one significant way, Americans have reason to be optimistic. The US unemployment rate is almost unchanged: 3.7 percent, compared with 3.6 percent in April when we last conducted the survey. And three-month moving wage growth remains strong: 6.4 percent in October, compared with 6.0 percent six months ago.

Inflation, however, remains stubbornly high: 7.7 percent year over year in October, compared with 8.3 percent in April. Thus, in real terms, the average American household income today buys less than it could six months ago.

In a context in which price gains outstrip wage growth, more respondents than last year believe America is doing a poor job of providing opportunities for all people (Exhibit 2). And they expect that the trend will continue for themselves and the country in a year and five years from now.

Even cohorts who are relatively economically well-off were pessimistic. Adults aged 25 to 34 suffered the highest drop, underscoring the challenges facing those entering their prime earning years. Higher-income Americans (more than $100,000 annually) experienced the highest drop—24 points—in overall economic sentiment compared with that of six months ago. Although the survey did not ask directly, high-income Americans may have been initially insulated from high inflation (as seen in the spring 2022 run of AOS), with financial tools to alleviate the effects, but the sustained rise in prices and perhaps other factors ended up diminishing their optimism.

Spending more and cutting back—yes, both are true

We asked Americans about their spending habits, and they reported what seemed to be two approaches: some are spending more, and others are cutting back, with variation across categories of expenditure (Exhibit 3). Americans have notably increased spending on essentials such as groceries, utilities, transportation, housing, and healthcare. At the same time, many others are cutting back in many of the same categories. What determines the approach? Income—those with lower incomes have slashed discretionary spending and, in some cases, essentials.

Americans are spending more and cutting back—yes, both are true.

While 19 percent of American households are spending less on groceries, for those making less than $50,000 annually, 23 percent say they have cut their grocery budget. By contrast, just 12 percent of those making more than $100,000 annually have cut back.

With cash buffers from the stimulus checks running low among low-income households, Americans are increasingly resorting to drawing down savings and running up credit card debt. Twenty-four percent of respondents saw a decrease in their debt payments or savings, a 4 percent increase in the past six months. The rising interest rate environment and increased reliance on debt financing may increase financial difficulties for American households in 2023.

Ultimately, the prolonged squeeze on budgets has worn down even the most optimistic Americans. Higher interest rates and prices have combined with lower values and returns on investments. There may still be opportunity. But for many, it feels further away than it did just a few months ago.

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