Friday, October 27, 2023

The Souring of America


I can't get over this chart, from early September in The Economist, which I saw somewhere on Substack—sadly can't reconstruct where exactly.

The light blue line is the University of Michigan index of consumer sentiment, which has been going on since 1946 and is regarded as a very reliable indicator of how Americans feel about the economy and predictor of how much money they're going to feel like spending. The dark blue line is an index constructed by the magazine (after an initial idea by a Twitter user called @quantian1) to predict what consumer sentiment ought to be, based on a bundle of 13 economic indicators like inflation, unemployment, and gas prices, and as you can see it does a really good job for the first 40 years to which they applied it, tracking the actual U of M consumer sentiment very closely (the real consumer feelings are more emotional, more depressed during the lows and more excited in the highs)—it accounts for 86% of the movement in the traditional number.

And then it goes wacky, immediately after the first financial crisis of COVID in 2020. It continues to show the same shape as the actual consumer sentiment, low when it's low and high when it's high, but at a distance of some 30 points.

Or rather, and this would be my own contribution to the discussion, I think, it's the consumer sentiment that's gone wacky: it seems to have fallen into a psychological depression, not an economic one. The economists have been worrying about a "vibecession", or an economic downturn caused by vibes instead of economic trends, but maybe it's just pure vibes without any economics.

Because there clearly hasn't been any recession, in spite of the deep gloom, and isn't any likelihood of one, in spite of the scary rise in interest rates and concomitant hike in housing costs. This was underlined by yesterday's release of the quarterly numbers on economic growth as measured by GDP; at 4.9%, it was the fastest since the COVID crisis began, and more than twice that (2.1%) of the previous quarter; and most important, the growth is driven by those same consumers, who, instead of cutting down on their consuming as the terminally depressed are supposed to do, are instead spending with abandon:

Thursday’s report on the nation’s gross domestic product — the economy’s total output of goods and services — showed that consumers drove the acceleration, ramping up their spending on everything from cars to restaurant meals. Even though the painful inflation of the past two years has soured many people’s view of the economy, millions have remained willing to splurge on vacations, concert tickets and sports events.

As you might expect from the economic numbers, with wage growth definitively outstripping inflation since the beginning of the year

Statistic: Difference between the inflation rate and growth of wages in the United States from January 2020 to August 2023 | Statista
Find more statistics at Statista

Focused on those with the lowest wages, but everybody's throwing their money around like the Roaring Twenties. We're behaving the way The Economist's model predicts we will, in spite of our depression. Or maybe you could say we just think we're depressed. Not so much sad as soured, like milk that's been left out of the fridge too long. 

It looks like a new political reality, in which the public refuses to believe the politicians are doing anything right. Maybe kicked off by Trump and reinforced by media bothsiderism. I don't think I know what it means in terms of electoral politics. It's clear we're not recognizing what Democrats under Biden have managed to accomplish over the past three years. They don't get credit rescuing us from a hole when we imagine we're still in it.

Maybe it means a very low-turnout election, in which voters decide the politicians can't do anything to help and it's not worth voting at all, which could be a bad thing; maybe more powerful for cultural voters on issues like abortion and climate change and voting rights, and more power for youth and minorities, following the trend since 2018, which would be a pretty good thing, though I would wish economic needs would be more a part of the mix (minimum wage laws, labor organization rights, development of alternatives to the liberal arts college in postsecondary education, the equalizing use of the tax system to take from the rich and give to young children...). I do hope left and liberal politicians will start letting themselves think about it, anyway.

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