The economy is booming, with unemployment near a 50-year low. Yes, there is high inflation, but NGDP is up 10.6% over the past 4 quarters, easily outpacing the rate of inflation. Nonetheless, the public feels horrible:
US consumer sentiment plunged in early June to the lowest on record [since 1978] as soaring inflation continued to batter household finances.
The University of Michigan’s preliminary June sentiment index fell to 50.2, from 58.4 in May, data released Friday showed. The figure was weaker than all estimates in a Bloomberg survey of economists which had a median forecast of 58.1.
That is rather surprising, given that the economy presents a mixed picture with both good news and bad. Why so glum?
In April of last year, I predicted that the public’s mood would turn sour. When discussing the massive fiscal stimulus, I made this observation:
There’s always a price to pay for unsustainable good times, and thus I expect the public’s mood to turn sour in the fall and winter, even as employment recovers—indeed because employment recovers. Someone has to do all those crappy jobs.
My point was that people would be working much harder, but not earning much more money. At the time, some workers earned more on unemployment than they had earned on their previous jobs.
Is there any data to support my claim? I mentioned above that NGDP was up 10.6%. In most cases, that figure is highly correlated with changes in personal income. But not this time. Personal income is up only 2.6% in the twelve months to April 2022, far below the rate of inflation. This reflects the withdrawal of fiscal stimulus. No wonder the public is so grouchy. (The unexpectedly high inflation made things even worse than I expected last April.)
To be clear, I don’t think this fully explains the public’s extremely bad mood. Consumer sentiment was far higher (71.8) back in April 2020, when the unemployment rate was 14.6%. The public has clearly become grouchier due to factors beyond just the economic situation. But it’s a big part of the story.
PS. Interestingly, consumer sentiment in June 2008 (56.4) and February 2009 (56.3) were virtually identical (at a very low level). But look how different the two economic situations were!
June 2008: Unemployment = 5.6%, 12-month inflation = 4.9%
February 2009: Unemployment = 8.3%, 12-month inflation = 0.01%
What did Tolstoy say about unhappy families?
READER COMMENTS
Mark Z
Jun 17 2022 at 7:50pm
I think you’re overlooking perhaps the most important factor: expectations of a looming recession. Metaculus currently has the probability of a recession before the end of the year as 70%. Many serious economists and other experts have started predicting a recession in the next year or so.
Scott Sumner
Jun 18 2022 at 12:18am
Maybe, but in April 2020 we were in the deepest recession since the 1930s, and consumer sentiment was far higher.
Matthias
Jun 18 2022 at 9:28pm
If sentiments are forward looking now, couldn’t they also have been forwarded looking back in April 2020?
(I’m just saying this as a formal way to repair the argument. I don’t have an opinion one way or another. I don’t know enough.)
Rodrigo
Jun 17 2022 at 7:52pm
Not that you put much weight on real gdp numbers but is it not very likely we are already in a technical recession? (2 consecutive quarters of negative real gdp decline) at a time when inflation is running north of 8%, meaning the fed will need to keep tightening even as unemployment starts to tick up (many layoffs in tech, real estate and others industries).
my personal sourness stems from loosing 35% (non spec, tech heavy portfolio) of my wealth in a very shorts timeframe and fearing we are entering a new era of “higher rates as far as the eye can see” (you might remember saying the exact oposite many years ago, kudos to you) which would mean marker returns would not be nearly as generous as they were in the past decade.
Hope I am wrong and we are able to go back to how things where but they rarely do.
As of now, there are plenty on things to be sour about besides the aforementioned negative wealth effect, housing shortage+Mortgage rates will probably lead to even higher rents (3x since pre pandemic and climbing here in miami) food, gas, prices, wages not keeping up with inflation, lead times, shortages(notably baby formula for baby Catalina, my daughter) covid wont go away, air fare going through the roof, employers wanting people to waste hours of their day in traffic only to get to the office to zoom with coworkers, crypto crashing (luckily avoided this one) and still not being able to travel to asia (love japan) among other irritating aspect of this hopefully not new normal we now live in!
Scott Sumner
Jun 18 2022 at 12:20am
I am pretty confident that we didn’t go into recession in the first quarter. Monthly job growth has been red hot.
Matthias
Jun 18 2022 at 9:30pm
Higher interest rates don’t lead to higher rents (or higher payments for new mortgages).
Rather supply and demand of housing sets rents (and indirectly mortgage payments).
Once rents are determined, interest rates tells you what the house is worth. (Similarly for mortgage payments to mortgage size.)
Lizard Man
Jun 17 2022 at 7:57pm
If NGDP growth is larger than inflation, musn’t incomes have increased by more than inflation, by definition? I could imagine median household income falling while overall income rises, but with the gains in employment, it seems more likely that average wages are down while household income and hours worked are up.
Scott Sumner
Jun 18 2022 at 12:22am
National income rose in real terms, but (due to the end of stimulus) personal incomes fell.
Spencer Bradley Hall
Jun 18 2022 at 10:51am
Inflation is the most destructive force capitalism encounters.
As Dr. Leland Prichard, Ph.D. Economics Chicago 1933, predicted in 1963 in his money and banking textbook – his economic syllogism posits:
#1) “Savings require prompt utilization if the circuit flow of funds is to be maintained and deflationary effects avoided”…
#2) ”The growth of commercial bank-held time “savings” deposits shrinks aggregate demand and therefore produces adverse effects on gDp”
#3) ”The stoppage in the flow of funds, which is an inexorable part of time-deposit banking, would tend to have a longer-term debilitating effect on demands, particularly the demands for capital goods.”
Real investment, e.g., CapEx, as contrasted to OpEx, “is any type of expense that a company capitalizes (“amortized or depreciated, strait-line or MACRS accelerated, over the life of the asset”), or shows on its balance sheet as an investment, rather than on its income statement as an expenditure.”
Matthias
Jun 18 2022 at 9:37pm
At most you could say that high and variable inflation is bad.
Expected inflation is mostly fine. (Apart from being an implicitly higher capital gains tax and some other second order effects.)
And a price level growing slower than expected and targeted is just as bad (or worse) than unexpectedly high inflation.
Also: when there’s an unexpected supply shock that crashes real GDP, inflation might be the lesser evil, compared to letting ngdp veer off track.
Diana Weatherby
Jun 18 2022 at 11:33am
Well, I know hard working folks with decent pay who can’t find a place to live, as in at all. There are no openings. Something will come open and get 40 applications in one day. Becoming homeless on a good salary while I work my rear off would make me grumpy.
vince
Jun 18 2022 at 3:12pm
“Well, I know hard working folks with decent pay who can’t find a place to live, as in at all. There are no openings.”
Too many college graduates with goofy degrees and not enough construction workers. Who wants to go into a trade and get their hands dirty?
Chris
Jun 21 2022 at 11:33am
You want construction workers, but the construction industry is poised to be extremely hard hit if we go into a recession. Won’t build housing if people aren’t able to buy it and won’t build commercial property if people aren’t buying as much stuff due to inflation. (also, construction is extremely expensive right now, due to material shortages, and that is not looking like it will get better any time soon).
Construction work is also, generally, not paid very well at all. There are tradesmen who are paid better than laborers, but still not exactly comparable to most jobs that require a college degree.
Anonymous
Jun 29 2022 at 9:07am
Many tradesmen are paid far better than most college graduates
Matthias
Jun 18 2022 at 9:39pm
Which part of the country are you talking about?
Jose Pablo
Jun 19 2022 at 4:49pm
That’s pretty weird, Diana.
If hard workers with good salary are homeless, who is living in the existing houses?
Unemployed?, people with “bad” salaries?
“Good” and “bad” are not the most precise terms, but if a good salary is a salary above the median one, are you implying half of the population is homeless?
Andrew_FL
Jun 18 2022 at 11:56am
Unemployment is low but employment levels remain low so they’re unhappy and not working “those crappy jobs”
Anders
Jun 18 2022 at 5:01pm
I have no clue about economics. I studied head driven phrase structure grammar, that is all. But common sense explains this better than my economic illiteracy. We first increased money tenfold, nothing happened. To my mind, because we were slow to spend it, what other reason can there be? The latest stimulus changed that, and demand rose. While supply chains slowed down and increasingly focus on security. Car rental prices went up 500% in the US, leaving me, a well off socialist, dependent on public transport outside of the east coast. Jobs abound, but everything feels rickety. So what do consumers do? They spend while they can while worrying about the future.
Philip H
Jun 19 2022 at 9:43am
Hello, fellow linguist! Always lovely to hear the obscure terms of art…
“everything feels rickety” – This is kinda by design, isn’t it? I rather object to Sumner’s question, because the way capitalism works is to cast everyone into a feeling of mild anxiety all the time. That’s the impetus that drives us to work more, create more, spend more. It’s an inherently unpleasant situation.
(I think it’s a lot less unpleasant than the alternatives, which generally involve a lot more farming and a lot less lovely Youtube videos; but the fact that capitalism is our best option doesn’t mean we have to blind ourselves to its inherent harrying sickness.)
vince
Jun 20 2022 at 3:51pm
“That’s the impetus that drives us to work more, create more, spend more. It’s an inherently unpleasant situation.”
Inherently unpleasant looks at the work-more side. Inherently pleasant looks at the create-more side. Work hard, play hard.
Scott H
Jun 21 2022 at 11:55pm
“because the way capitalism works is to cast everyone into a feeling of mild anxiety all the time”
This place needs eyeroll emojis.
Spencer Bradley Hall
Jun 19 2022 at 11:45am
Read:
When the Lies Come Home – The American Conservative
Chris
Jun 21 2022 at 12:00pm
What nonsense. Biden’s policies created this recession? Name one. The federal government poured more money into the economy under Trump than under Biden. Biden has relaxed COVID measures significantly, normalized trade, made little to no change to immigration, and done little else. Name a single policy of his that could have made our current economic condition better or worse.
That stupid opinion piece makes it sound like Ukraine doesn’t actually want to fight to maintain its freedom from an oppressive Russia. They are asking – begging – for support from the west to protect their homeland from an outside invader. Your stupid article reads more like pro-Russia propaganda, which makes sense, since it comes from a man known for being a pro-Russian commentator who, by all accounts, absolutely loves the idea of authoritarianism.
And the money we’ve sent Ukraine is a drop in the bucket of our federal budget. If it works to help prevent Russia from becoming increasingly emboldened in it’s empire building, that will help maintain a stable economic and security condition in Europe, which is a good thing.
Scott H
Jun 21 2022 at 11:45pm
I’m grouchy because I invested in stocks and not in real estate. And, my income is more difficult to adjust to inflationary pressures than some others. Also, there’s a lot of work to do within an infrastructure making it harder to get things done.
Comments are closed.