Economic signals are blinking green. Why Americans are still seeing red.

The American economy reads a little like a Dickens novel these days – and for Joe Biden, it’s in desperate need of a plot twist.

For more than a year, the narrative has been stuck between “best of times” data and “worst of times” sentiment. Unemployment has been incredibly low and consumer spending abnormally resilient. But consumers have proved dour, unwilling to give President Biden much credit because of the sting of recent high inflation and continuing sky-high housing costs.

Now, the United States is poised – maybe – to turn the page on such uncertainty. The economy is slowing. Inflation looks like it’s falling again. On Friday, the Labor Department reported that the unemployment rate rose to 4.1%, the highest rate since 2021.

All this could help convince the Federal Reserve to cut interest rates in coming months, making business loans and home mortgages cheaper and bolstering Mr. Biden’s narrative that the economy is getting back to normal.

“I think people are just uncertain and that’s why we got to be steady, stay the course and continue to produce this incredible job” expansion, President Biden said in an interview with Yahoo Finance in May. 

But the economy has proved fickle before. After falling dramatically last year, inflation hit a stubborn plateau at the beginning of this year, killing hopes of rapid cuts in interest rates. On the other side, a growing number of economists are warning that the slowdown, far from normalization, is in fact signaling the threat of a deep recession.

How voters will interpret all this come November is complicated – and could get more complicated if Mr. Biden drops out of the presidential race. Much depends on how the eventual Democratic nominee – whoever that is – frames recent trends and what promises they make.

For at least the last half-century, the state of the economy has been a good predictor of presidential elections. When the sum of the inflation and unemployment rates – what’s known as the misery index – is high, incumbents lose. (Ronald Reagan is the exception, winning reelection in 1984 despite a misery index in the double digits.) When the misery index is in the single digits, they win. (Donald Trump is the exception.)

Mr. Biden’s numbers look pretty good so far. Combining the June unemployment rate and the latest consumer price index from May, his misery index stands at 7.4, which would be the lowest of any presidential incumbent in 50 years if it holds (see chart).  

But “people don’t remember so much what you do as how you make them feel,” says Brett House, professor of economics at Columbia Business School, noting that this can have a cumulative effect over time. After the major pandemic disruptions to the economy, “People’s feelings are taking into account the real stretch that’s been imposed on their budgets over the last few years.”

Inflation high on voters’ minds 

Inflation is Mr. Biden’s economic bugaboo. Young or old. Rich or poor. The topic is on everyone’s lips, even here in liberal Boston. 

“I don’t like it the way it is,” says Norman Bassett, a custodian at Faneuil Hall Marketplace, where tourists gather to shop and eat in historic buildings linked to the American Revolution. “There’s too much inflation,” a worry for him as he nears retirement. 

“I could go and get a coffee at Starbucks for, like, $4; now, it’s like six bucks,” complains Alex Kickham, who’s working at the Faneuil Hall information desk and will start college soon. “Gas prices have gone up immensely as well.”

Never mind that inflation, which soared above 9% two years ago, has fallen by nearly two-thirds. And excluding volatile food and energy prices, what’s known as core inflation is even lower. Last week’s report on personal consumption expenditures showed that in May, they rose at an annual rate of 2.6%, their slowest pace in more than three years. The most recent readings “do suggest that we are getting back on a disinflationary path,” Federal Reserve Chairman Jerome Powell said Tuesday. 

But while prices are not climbing as fast, they’re still much higher than when President Biden took office. Another reason for voter skepticism: Housing costs continue to soar.

“I’m scared to move, actually, because the rent went up drastically,” says Jamarkia Taylor, a fourth-year premed college student working a retail cart in Boston’s Quincy Market. “Inflation is insane right now.”

In a survey in May, Pew Research found that inflation topped the list of voter concerns, with 62% calling it a very big problem (including nearly half of all Democrats). 

While workers have been hit with higher prices, the remarkably strong job market has helped to compensate. For more than a year now, wage gains have outpaced the rise in prices. That’s been especially true for workers at the bottom of the pay scale and highly paid workers with skills in great demand right now.

The U.S. is much better off than it was four years ago because there are more job opportunities, says Hector Chincilla, a pub worker in downtown Boston who moved here from Honduras six years ago. Even though his rent has soared by nearly a third in that time, he says, “If you want to improve your life, you can study more English and you can get a better job and more pay.”

“I’m pretty optimistic,” says Nigel Daley, a Silicon Valley resident and co-founder of Vantage Discovery, an online shopping service powered by artificial intelligence. “I feel like there’s a dissonance between what I read and what I see.”

“Wages have done pretty well. It looks like a pretty rosy scenario,” says David Blanchflower, economics professor at Dartmouth College. “What’s interesting, actually, is that Biden in the polling numbers doesn’t appear to be getting a great benefit.”

Caitlin Babcock contributed reporting from Washington.