What the feel-good sentiment reveals and conceals
Surender, the man who cleans the motel room I was staying in last week, told me that he was going home to his village for Diwali. I asked him how much money he made every month. Barely enough, he said, to cover his costs in the city. And almost nothing left to send home.
The job market is tough, I said. No, it isn’t, was his response. Then why was he not getting a good salary? He wasn’t, he said, but others were. I asked him whether he meant his friends were doing better than him. Again, the answer was in the negative. He had heard on TV and read on WhatsApp that people were making a lot of money.
In the old days, we used to call this the ‘feel-good’ factor.
It is the exact opposite in the US. At least, that is what the Nobel Prize-winning economist Paul Krugman believes. He says America is a ‘feel-bad economy’ right now, where consumers believe that the economy is doing badly, even though it is performing much better than anyone expected.
Krugman has crunched some numbers to show how far apart real consumer sentiment is from what it ought to be, given that Americans are spending like never before, their real wages are up, the inflation rate is cooling off, and unemployment is at record low levels.
Right now, consumer sentiment should have been between 85 and 90 compared to the baseline. Instead, it is hovering between 60 and 65. The reverse was true during the Trump years. Krugman’s math suggests consumer sentiments ought to have been between 85 and 90 at that time, but observed consumer sentiment was close to 100.
Consider India now. The Centre for Monitoring Indian Economy’s (CMIE) data tells us that the employment rate — or the number of working-age people who have work — has been stuck at 37 per cent for the past eight quarters, or two years. Yet, consumer sentiment has jumped from less than 60 to 97 in the same period. The Index of Consumer Expectations, which gives a snapshot of what people feel their next year is going to be like, has jumped from 57 in the July-September quarter of 2021 to 97 in September 2023.
Even if you take the urban middle class, the trend is more or less similar. The production of key consumer durables, which are mostly bought by the middle and affluent classes, fell sharply in September this year. If India produced five passenger cars last September, only four were produced this time. If we produced 100 units of apparel in September 2022, production dropped to just 82 units this time. Middle-class jobs have taken a hit as well over the past year or so, as employment in startups and legacy IT companies has dried up.
Despite that, the CMIE’s data tells us that consumer sentiment, among those who earn between Rs 5 lakh and Rs 10 lakh a year, has risen from 54 in the July-September quarter of 2021 to 98 now — back to almost where it was before Covid hit us. The Index of Consumer Expectations for the next one year has risen from 53 to 96, again close to what it was in March 2020.
The feel-good sentiment that Surender expressed to me, despite his low income, wasn’t just an isolated case. The data I have quoted above shows that it is widespread. What explains this divergence between the actual economic situation and how it is perceived by people? What is the reason that consumer sentiment is way below what it ought to be in the US, while in India it is way above what economic data would predict?
Krugman’s original answer blamed inflation for the feel-bad factor in the US. People, he says, don’t care that the inflation rate has slowed down. They expect prices to be back where they were when they first began to spiral out of control. By this logic, India too should have been afflicted by the feel-bad sentiment. After all, average retail prices have gone up by 14 per cent in the past two years, while food prices are up by nearly 17 per cent. This has made no difference to consumer sentiments in India.
Krugman’s second explanation for the feel-bad sentiment in the US probably also explains the feel-good sentiment in India. He says that consumer sentiment is often based not on their actual experience but on what the media and pundits have to say about the economy. To this one can add what they imbibe from social media.
Krugman claims that the media in the US finds it very difficult to praise the Biden administration for beating down inflation, creating more jobs and maintaining a high growth rate. He believes that this is an ingrained bias, which has fed a narrative that Biden is bad for the economy. Krugman argues that consumers are politically partisan — Democrats believe that Biden is doing a good job, while Republicans believe the opposite. It is just that Republicans are four times more partisan in their stated beliefs than the Democrats, and that is what is turning a good economic situation into a ‘feel-bad’ economy.
Krugman’s thesis holds true for India as well, but in the opposite direction. Indian media, by and large, tends to praise the government for even the smallest good news on the economy, while it goes silent whenever there is any negative news. Those who back the government are much more vocal and powerful on social media as well, which helps amplify the Modi sarkar’s message on the economy, while stamping down any counter-narrative.
Is that necessarily a bad thing? Both yes and no. It is bad because it stops people from having a say in economic policies because they do not get correct information on their impact. On the other hand, the feel-good factor encourages entrepreneurship and risk-taking, which keeps the ‘animal spirits’ flowing through the economic system.
The author is a senior economic analyst
