This is easy to explain with charts and ideas.(Click on image to enlarge)
An Imagined ParadoxThe Brookings Institute measured the macro conditions and wonders why sentiment is so poor.Please consider
Despite recent concerns over a slowdown, the U.S. economy is performing well according to most objective metrics. The top-line unemployment rate was 4.1% as of September 2024, well below its 21st-century average of 5.7%. GDP growth has been substantial, with real (inflation-adjusted) GDP growth of 3.0% over the past four quarters. Wages have outpaced inflation by 0.9% and the stock market has risen by 23% over a similar period. Investment, a key driver of the business cycle, fell very little as a share of GDP following the pandemic, outperforming the recoveries from every recession since 1980.
Judged over a longer time horizon, U.S. economic performance is similarly impressive, especially given the wrenching shock from the COVID-19 shutdowns of 2020 and 2021. Between Q1 2020 and Q2 2024, gains in housing equity and the stock market led to a remarkable $50 trillion expansion in household wealth—$28 trillion in inflation-adjusted terms. Despite the 2021–2023 inflation surge, wages have outpaced price increases since Q4 2019, with real median weekly earnings up 0.3%—with the highest gains for lower-wage workers. Indeed, despite COVID-19, real U.S. GDP is now $130 billion higher than the Congressional Budget Office (CBO) projected it would be in its pre-COVID-19 forecast.
Actual sentiment versus predicted sentiment
Before the pandemic, variation in sentiment could be largely explained using standard macroeconomic variables. In particular, a model that predicted sentiment using the unemployment rate, the inflation rate, aggregate consumption, and the performance of the stock market can explain 77.4% of the variation in sentiment over 2005–2019 (see Figure 2). However, over the last few years, this relationship has broken down, with a wide gap emerging between observed sentiment and predicted sentiment based on the state of the economy.
In simple terms, the puzzle we are examining is as follows: At most points in time over the past four decades, if consumers lived under an identical macroeconomy as they have now, their feelings about the economy would have been largely positive. But now this is no longer true; consumer attitudes about the economy are instead near all-time lows.
In sum, several trends suggest that consumer sentiment is not wholly driven by rational and accurate perceptions.
Real spending on international travel and the volume of travelers going through Transportation Security Administration (TSA) checkpoints have rebounded back to their pre-pandemic levels. Real spending on air transportation has skyrocketed more than 40% above its pre-pandemic level.
CEO confidence itself remains above its pre-pandemic level. By this metric, businesses have been optimistic about the growth of the U.S. economy.
Possible explanations
If economic conditions are strong, and people are behaving in a way that reveals some optimism about the economic environment, why is sentiment so weak? Analysts have advanced an array of possible explanations. One possible explanation, offered by Greg Ip of the Wall Street Journal, is that peoples’ views about the general state of the world and country spill over into their views about the economy. Ip refers to this as “referred pain,” and notes that events like “intensifying political and cultural conflict and intolerance, the pandemic, the border, mass shootings, crime, war in Ukraine, and now the war in the Middle East” may be negatively affecting views of the economy, even if national aggregates tell a brighter story.
Such an explanation is certainly possible, although difficult to test since the non-economic factors that may be causing referred pain are difficult to identify. Moreover, several of the factors identified by Ip are actually improving over the period of interest. For example, in the first half of 2024 most violent crimes occurred at or below pre-pandemic levels, with less frequency than in the preceding 4 years, and the U.S. withdrawal from Afghanistan in 2021 means our nation is not at war for the first time in two decades.
Another plausible explanation, advanced by economist Jason Furman at a Brookings Institution event in January 2024, is that the pace of cumulative wage gains in the post-pandemic era is markedly slower than the years immediately preceding the pandemic (i.e., 2014–2019). Indeed, relatively slower real wage gains could plausibly be a factor behind the sentiment puzzle. However, several caveats are warranted. One, discrepancies in cumulative real wage gains are highly sensitive to the measure of wages, the inflation deflator, and the periods of comparisons. Three, if cumulative real wages drove sentiment, it is not clear why older households—with sharply lower rates of employment—would have reported a concomitant drop in sentiment.
Another proposed explanation for the disconnect between sentiment and fundamentals is that people are receiving more negative news about the economy despite the underlying fundamentals.
Ivory Tower ThinkingWow what an amazing consortium of ivory tower thinking.For starters, crime is high. Please note The Committee on Oversight and Accountability is investigating the .
In 2023, the FBI initially reported an estimated 1.7 percent decrease in violent crime in 2022 but later quietly revised the report to show a 4.5 percent increase––a staggering 6.2 percent change.
The Biden-Harris Administration championed the purported decrease, but there was no decrease. The FBI failed to include in its initial count “an additional 1,699 murders, 7,780 rapes, 33,459 robberies, and 37,091 aggravated assaults,” resulting in not a decrease but an increase in violent crime of 4.5 percent in 2022. The FBI quietly revised the report to reflect this increase in violent crime but did not publicize it.
And CEO confidence is up. What a hoot. It’s shocking, shocking I say, that people are not thrilled about the number of billionaires the US has created to balance out those worried about being evicted.Brookings also blamed politics. On this theory, Republicans are upset at Biden more than they should be, despite the fact that Biden is heavily despised by those not living in an ivory tower.Let’s leave the ivory tower for a moment and live in the real world.A Breakdown, by Sector, of the Negative 818,000 BLS Job Revisions More By This Author:No Matter Who Wins The Election, Expect The Cost Of Microchips To Soar Excluding Government, Year-Over-Year Employment Is Negative 9 Straight MonthsJob Openings Drop By 418,000 As Quits Show Major Weakness
