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WCI Founder Dr. Jim Dahle
One of the strangest economic phenomena of the 2020s is that consumer sentiment has fallen more dramatically than at any other time when the economy has performed well. People think the economy is bad when it's actually going gangbusters by any objective measure. This is actually a phenomenon, and I want to explore it a bit in this post.
Is the economy doing well now?
My crystal ball is always cloudy. I don't know what the future holds. But as I write this post at the end of January 2024, the economy is looking good.
- Fourth-quarter GDP growth was an annualized 3.3%, significantly higher than the 2.2% forecast.
- Inflation moderated to 3.35%, down from a peak of 9.06% in June 2022.
- Unemployment has been below 4% for several years. Most businesses are begging to hire anyone.
- In 2023, the stock market was up 26%.
- It is the first time since 2008 that payments are above 5%.
- Bonds are also up almost 6% in 2023.
- Despite the dramatic increase in interest rates, house prices have remained stable.
- After nearly two years (2021-2022) of inflation outpacing wage growth, wage growth is now 5.2%, 2% higher than inflation.
Despite similar interest rates, the deficit/federal debt—as measured by the amount of GDP needed to service interest—is higher than it was in the 1990s.
In hindsight, things look good too.
- The central bank appears to have „nailed” a soft landing that was feared to be impossible.
- Restaurants abound.
- Entertainment events cannot be ticketed.
- Even college football players make a living.
Yet despite this rosy picture, consumer sentiment (ie how people think the economy is doing) is dire.
People think the economy is worse today than it was during the global financial crisis. As a reminder, when the stock market fell 40%+, people worried about the safety of their money in money market funds, 9 million jobs were lost, GDP fell more than 4%, and 30% of homeowners (myself included) were underwater on their mortgages.
What is going on? Is our economic history really that bad? How can we explain this phenomenon? I think there are many contributing factors.
More info here:
How our portfolio performed in 2023 (including real estate!)
I have $150,000; Should I be nervous about investing a lump sum when the stock market is at an all-time high?
How politics affects the view of economics
Perhaps the biggest factor is where you get your messages. If you read CNN, which leans more to the left, you will hear a more nuanced picture of the economy than Fox News, which leans more to the right. Your political persuasion has a dramatic effect on your perception of how well the economy is doing. Check this out:
Basically, if „your guy” (or girl) is in the White House, you think things are going well. If it wasn't for „your boy” you'd think we were going to Hades in the milk bag. I think the division of media in this country is fueling it. Most people read, listen to, and watch the same news sources. Not so much anymore. There are liberal messages and conservative messages. Social media echo chambers make it even worse. A lot of people from central bank NPR Blame social media.
I find that fascinating, especially since the president honestly doesn't have that much influence on the economy, no matter how much credit they try to take when it's going well or how much their opponents blame it when it's going bad. Even if the president's policies have a huge impact on the economy (they don't), the effects of those policies have such a large lag (years or even decades) that it can be really challenging for the typical non-economist. Sort out who gets the loan and why.
But politics cannot explain all this. Check out this map:
I love the crossovers that happen on Inauguration Day. Really? Is the economy worse in the fourth week of January than in the third week? Are voters really that stupid? (Don't answer that.) The reason for including this graph is that something happened in early 2020 that 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 info here:
Why You Should Ignore Financial Media
The impact of the pandemic on the US economy
Well, we all know what happened in 2020. Out of toilet paper. Clearly, the cause of this economic tragedy is Tingleberries. Oh wait, correlation is not causation. But a few things happened starting in 2020 that could explain all of this. Global economic output has fallen dramatically. Although that fall was very temporary, it was scary. Ask your favorite joint surgeon, whose „selected” cases are all on hold for months. We have lost a lot of faith in our economies, in our governments, and in our scientists. I think it had a significant effect.
I think a bigger problem than the epidemic is our response to it. The central bank (and similar institutions around the world) opened the faucets too wide and left them open too long. Now I don't blame them. It's hard to get it right, and I think it's better to err on the side of inflation than deflation. But in retrospect, they clearly blew it, at least until the end. We raised inflation to 9%.
Most adults and all young adults have never experienced hyperinflation before. I am almost 50 years old. I have no practical memory of the stagnation of the 70s. I don't remember sitting in the gas line. I have never had an 18% mortgage. Seeing interest rates rise 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. It actually makes people feel pessimistic about the future.
„I finally added some savings, but now everything costs twice as much!” One might say. Low consumer sentiment may be related to this traumatic economic shock (though certainly not the reverse, not inflation, not deflation) even though inflation is now moderate. Central Bank It's even thought that consumers haven't yet adjusted to the new high prices we're paying.
Perhaps the worst part of our current economy is the housing crisis. Many people, especially young people, don't think they will ever be able to afford a home. Although rental rates have returned to „normal” levels and the rapid increase in interest rates, new home prices are also through the roof. The main reason for this is limited supply. We stopped building houses in 2008 and never caught up again. Even many people who already own a home feel trapped by a low mortgage. They don't want to give up a 2.75% mortgage to get 6.75%. The impact of a large portion of most people's budgets has a large impact on their perception of the economy.
End of freebies
Many freebies have been given out over the years. Student loan interest rates go as low as 0%, and no payments are required. Business owners have their „free” PPP loans forgiven. Most other people received three rounds of stimulation tests. All that is over now. Additionally, for those who need money or want to borrow, the interest rates are as high as 4%. Maybe it's like the cops show up at a house party and it's time to go home.
More info here:
Your Crystal Ball Predictions for 2024
It's not entirely clear why so many people think the economy is terrible. There may be many factors, but it is difficult to know which is the most important. What I really want to know is what people are going to think the next time the economy is really terrible.
What do you think? Can't we all see that the economy is bad right now? Why do you think the gap between sentiment and traditional measures of economic strength has historically widened? Comment below!
„Oddany rozwiązywacz problemów. Przyjazny hipsterom praktykant bekonu. Miłośnik kawy. Nieuleczalny introwertyk. Student.