Recovery Runs Into New Risk in Vast Partisan Gap on U.S. Economy

(Bloomberg) -- Democrats and Republicans hold starkly diverging views of the U.S. economy and the gap is widening as the pandemic persists, casting a shadow over President Donald Trump’s hopes for a V-shaped recovery powered by pent-up demand as nationwide lockdowns ease.

One closely watched metric, the University of Michigan Index of Consumer Sentiment, reveals the political divide over the economy. Overall, the index rebounded from 72.3 in March to 78.9 in May on the strength of better-than-expected May jobs numbers. But it only ticked up 0.7 points for Democrats while surging 11 points for Republicans.

That gulf could expand as Election Day approaches and political sentiment becomes more entrenched closer to the vote.

Economists and policy makers use the monthly sentiment surveys to predict future consumer spending, which accounts for 70% of the U.S. economy. Any political disconnect reflected in the numbers could have real-world economic consequences with the U.S. officially in a recession touched off by the pandemic.

Republicans may be more inclined to increase consumption, emboldened by Trump’s push to reopen the U.S. economy. But Democrats who feel less confident during a Trump presidency may hold off on spending until after the election, potentially hampering any recovery.

Recovery Runs Into New Risk in Vast Partisan Gap on U.S. Economy

Economists have long observed partisan differences in consumer sentiment, with voters affiliated with the party in power always reporting better current conditions for their household and more optimism for the future.

“This political gap between Democrats and Republicans has shown up in our data going back to the Reagan administration, but it never persisted,” said Richard Curtin, the director of the University of Michigan’s widely cited consumer survey. “Only since Trump has been in office — and it occurred almost immediately after he won the election — did we see this big difference.”

But it’s unclear the extent to which members of the party out of power are really worse off, or if respondents are simply projecting their political views on to how they view the economy.

‘Moral Perspective’

“The more progressive movement is certainly wanting to have the economy address issues on a moral perspective of inequality and racism,” Curtin said. “And the other side says that the best way to improve those issues is through free markets and growth. And I think this election may be a turning point in that debate.”

Even after 44 years running the consumer confidence survey, Curtin acknowledges that “socially desirable responses” could be coloring the survey data as people say one thing about economic conditions while behaving another way.

Curtin notes that while the gap between Democrats and Republicans has widened, their trend lines almost always move in the same direction. Independents tend to track closely with the overall average. And party affiliation is just one of many demographic gaps in consumer sentiment: Young people tend to be more optimistic than older people, and richer people more upbeat than poorer, for example.

Still, an increasing number of real-world studies has found that partisanship does in fact drive consumer behavior.

Shopping Searches

Microsoft economist David Rothschild looked at online shopping searches for big-ticket items in the year before and after Trump’s election. What he found was little change in Republicans shopping for cars and houses — but a drop-off by Democrats.

Stanford University economists conducted a number of real-world experiments to test whether partisanship shapes buying and selling decisions.

In one, workers bidding for freelance assignments in an online task marketplace would quote lower prices if they knew they’d be working with someone who shares their political views. In another, people were less likely to purchase reduced-price Amazon gift cards from someone whose politics they disagreed with.

“Taken together, this amounts to compelling evidence that partisan sentiment affects economic behavior in contemporary American society,” economist Christopher McConnell and his co-authors concluded.

All those studies are important because they measure how people actually behave rather than what they tell survey-takers.

That behavior may not be irrational. Democrats really could be worse off than Republicans under the Trump presidency.

The 2018 tax overhaul, for example, capped deductions for state and local taxes at $10,000 — regardless of filing status. That disproportionately affected taxpayers in Democratic states that tended to have higher home prices and higher taxes. And Trump’s military spending, farm subsidies and energy policies have disproportionately helped states that vote Republican.

“I think the Democrats would be very cautious. We’re in such uncharted territory coming out of this Covid recession,” Rothschild said.

©2020 Bloomberg L.P.

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