Americans Feel Better Off in Their Personal Financial Situation for First Time in Five Years

Gallup has a critical poll out today that makes no mention of Barack Obama or Mitt Romney, but tells us something about the economy.

For the first time in more than five years, slightly more Americans are feeling financially better off than they were a year ago, rather than worse off, by 38% to 34%. This represents a significant improvement since May of President Barack Obama’s first year as president, when the majority — 54% — said they were worse off.

This trend line has come down dramatically since the beginning of the year, from a 20-point lead on feeling worse off to a 4-point deficit.

What could account for this? The economy has improved, but growth is hovering under 2%. Unemployment has come down decently if you look at the topline numbers, but not enough to keep up with population. And most of the improvements in the topline numbers comes from people falling out of the labor force (though some of this is expected because of baby boomer retirements).

I think we can chalk up some of this to the rise of perceptions on housing. The “wealth effect” is a demonstrable economic phenomenon. If home prices rise, and particularly if people get out from underwater on their homes, they feel like their economic situation has improved, and as a result they feel like they can spend money again. Deleveraging contributes to this, though a lot of that reduction in debt has comes from defaults. The rise of short sales, however, puts less of an economic price on those defaults, with the individual forgiven of the remaining debt (though their credit score does take a hit). So rising short sales, refinancing and the wealth effect can give people the perception that they’re better off. Or at least not worse off, and that’s the number that’s actually moving. “Better off” only increase from 37% to 38% from May to today; “worse off” dropped significantly, from 42% to 34%.

This also speaks to a divide within the economy right now, between consumers and businesses. Consumers feel pretty good about themselves, economic indicators show; but businesses are gloomy, perhaps because they see the headwinds from things like the fiscal slope. In addition, corporate profits would drop as government deficits drop, and they don’t want that.

Steve Benen games out the electoral implications. But I wonder what happens if and when businesses and consumers come into line on the economy. Who exactly will move to the other side? And what will the effect of deficit reduction, particularly near-term deficit reduction, be? Are we headed to Morning in America or 1937?

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