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By Dr. Jim Dahle, WCI Founder
One of the strangest economic events of the 2020s is that consumer sentiment is dramatically lower than it has been at any other time when the economy was otherwise doing quite well. People think the economy is doing terrible when it is actually going gangbusters by any objective measure. It’s really quite a phenomenon, and I’d like to explore it a bit in this post.
Is the Economy Good Right Now?
My crystal ball is always cloudy. I have no idea what the future holds. But as I write this post at the end of January 2024, the economy is doing just fine.
- Fourth-quarter GDP growth was an annualized 3.3%, significantly higher than the forecast of 2.2%.
- Inflation has been moderating and is down to 3.35%, dramatically better than the peak of 9.06% in June 2022.
- Unemployment has remained under 4% for the last several years. Most businesses are begging for anyone to hire.
- The stock market was up over 26% in 2023.
- Cash is paying over 5% for the first time since 2008.
- Even bonds made almost 6% in 2023.
- Despite dramatically increased interest rates, home prices are holding steady.
- While inflation was higher than wage growth for about two years (2021-2022), wage growth is now 5.2%, 2% higher than inflation.
Even the deficit/federal debt—as measured by the amount of GDP required to service the interest—is better than it was back in the 1990s, despite similar interest rates.
Anecdotally, things also seem great.
- The Fed seems to have “nailed” the soft landing that was feared to be impossible.
- Restaurants are full.
- You can’t get a ticket to entertainment events.
- Even college football players are making money hand over fist.
Yet despite this rosy picture, consumer sentiment (i.e. how people think the economy is doing) is terrible.
People think the economy is worse today than it was during the Global Financial Crisis. As a reminder, that was when the stock market was down 40%+, people were worried about the safety of their money in money market funds, 9 million jobs were lost, GDP was falling by more than 4%, and 30% of homeowners (including me) were underwater on their mortgage.
What is going on? Is our command of economic history really that poor? How can we explain this phenomenon? I think there are a number of contributing factors.
More information here:
How Our Portfolio Performed in 2023 (Including Real Estate!)
How Politics Impact Perception of the Economy
Perhaps the greatest factor is simply where you get your news. If you read CNN, which leans more left, you’ll hear a rosier picture of the economy than if you read Fox News, which leans more right. Your political persuasion has a dramatic effect on your view of how well the economy is doing. Check this out:
Basically, if “your guy” (or woman) is in the White House, you think things are going great. If “your guy” is not, you think we’re en route to Hades in a milk pail. I think a lot of that is fed by the division of media in this country. It used to be that most people read, listened to, and watched the same sources of news. Not so much anymore. There is liberal news and conservative news. Social media echo chambers make it even worse. Plenty of people from the Fed to NPR blame social media.
I find it all very fascinating especially since the president honestly just doesn’t have that much of an effect on the economy, no matter how much credit they try to take when it’s going well or how much their opponents blame them when it’s going poorly. Even if presidential policies had a huge effect on the economy (which they don’t), there is such a huge lag (years or even decades) in the effects of those policies that it would be challenging for the typical non-economist to really sort out who gets credit for what.
However, politics cannot explain all of this. Check out this graph:
I love the crossovers that happen on Inauguration Day. Really? The economy is dramatically worse in the fourth week of January than it was in the third week? Are voters really that dumb? (Don’t answer that.) The reason I include this graph is that something happened starting in early 2020 that seems to have lowered consumer sentiment to a “new permanent plateau.” Whether you lean right or left politically, the numbers are 20% lower than they should be.
More information here:
Why You Should Ignore the Financial Media
The Pandemic’s Impact on the US Economy
Well, we all know what happened in 2020. We ran out of toilet paper. Clearly, the cause of this economic malaise is dingleberries. Oh wait, correlation is not causation. But a few things did happen starting in 2020 that may explain all of this. Worldwide economic output dropped dramatically. Even though that drop was extremely temporary, it was scary. Just ask your favorite joint surgeon whose “elective” cases were all put on hold for months. We lost a lot of faith in our economy, in our governments, and in our scientists. I think that had a significant effect that lingers on.
Inflation Spike
I think a bigger problem than the pandemic itself was our response to it. The Fed (and similar entities worldwide) opened the taps too wide and left them open too long. Now, I don’t blame them. It’s hard to get it just right, and I guess it’s better to err on the side of inflation than deflation. But in retrospect, they clearly blew it, at least toward the end. And we ended up with inflation as high as 9%.
Most adults and all young people had never experienced high inflation before. I’m almost 50 years old. I have no practical memory of the stagflation of the ’70s. I don’t remember sitting in gas lines. I never had an 18% mortgage. To see interest rates go up 4% in a year was a once-in-a-lifetime experience for most of us. It was bonkers. Even our bonds lost 10%-15% of their value. That really makes people feel pessimistic about the future.
“I’m finally getting some savings put together, but now everything costs twice as much!” one might say. The low consumer sentiment is probably, in part, related to this traumatic economic shock even though inflation has now moderated (although certainly not reversed; we’re seeing disinflation, not deflation). The Fed even thinks consumers just have not yet adjusted to the new higher prices we’re paying.
Housing Crisis
Perhaps the worst part of our current economy is the housing affordability crisis. Many people, particularly young people, don’t feel like they can ever buy a home. Rents are through the roof but so are the prices of new houses, despite the rapid increase in interest rates back to “more normal” levels. The main factor driving this is limited supply. We just stopped building houses back in 2008 and never really caught up again. Even many people who are already in a home feel trapped in it by their low mortgages. They don’t want to give up a 2.75% mortgage to get a 6.75%. The impact of the largest part of most people’s budgets most likely has an outsized impact on their sentiment about the economy.
The End of Freebies
There have also been a lot of freebies passed out in the last few years. Student loan interest rates went to 0%, and payments were not required. Business owners got their “free” PPP loans forgiven. Most other people got three rounds of stimulus checks. That’s all over now. Plus, for those who need or want to borrow money, interest rates are 4% higher. Maybe it feels a bit like the cops just showed up at the house party and it’s time to go home.
More information here:
Your Crystal Ball Predictions for 2024
It’s not entirely clear why so many people think the economy is terrible. There are probably multiple contributing factors, but it’s hard to know which are the most important. What I really want to know, though, is what are people going to think the next time the economy really is terrible.
What do you think? Is there something we’re all missing that suggests the economy is terrible right now? Why do you think the gap between sentiment and traditional measurements of economic robustness is historically wide? Comment below!
