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Is the US economy doing well right now?

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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 worse than at any time before when the economy was otherwise doing quite well. People think the economy is doing badly when, objectively speaking, it's actually a mess. It's really quite a phenomenon and I want 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 well.

  • GDP growth in the fourth quarter was annualized at 3.3%, well above the forecast of 2.2%.
  • Inflation has moderated, falling to 3.35%, significantly better than the peak of 9.06% in June 2022.
  • Unemployment has remained below 4% in recent years. Most companies are begging to hire someone.
  • The stock market rose over 26% in 2023.
  • Cash pays over 5% for the first time since 2008.
  • Even bonds gained almost 6% in 2023.
  • Despite dramatically increased interest rates, real estate prices remain stable.
  • While inflation was higher than wage growth for about two years (2021-2022), wage growth is now 5.2%, 2% more than inflation.

Even the deficit/federal debt – measured by the amount of GDP needed to service interest rates – is better than it was in the 1990s, despite similar interest rates.

Anecdotally, things seem great too.

  • The Fed appears to have “mastered” the soft landing that was thought impossible.
  • The restaurants are full.
  • You cannot get a ticket for entertainment events.
  • Even college football players make incredible amounts of money.

But 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, at that time the stock market was down more than 40%, people were 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 behind on their mortgage.

What's up? Is our mastery of economic history really that bad? How can we explain this phenomenon? I think there are a number of factors that contribute to this.

More information here:

How our portfolio performed in 2023 (including real estate!)

I have $150,000; Should I be afraid of making a lump sum investment when the stock market is at an all-time high?

How politics influences perceptions of the economy

Perhaps the biggest factor is simply where you get your messages. If you read CNN, which leans left, you will hear a rosier picture of the economy than if you read Fox News, which leans right. Your political beliefs have a dramatic impact on your assessment of the economic situation. Look at that:

Basically, when “your husband” (or wife) is in the White House, you think things are going great. If “your man” isn’t, you’d think we were in a milk pail on the way to Hades. I think a lot of this is due to the divide in the media in this country. In the past, most people read, listened to, and watched the same news sources. Not so much anymore. There is liberal and conservative news. Social media echo chambers make it worse. Many people from the Fed to NPR blame social media.

I find this all very fascinating, especially because the president honestly just doesn't have that much of an impact on the economy, no matter how much credit he tries to take when things are going well or how much his opponents blame him when things are going badly running. Even if the president's policies had a huge impact on the economy (which they don't), there is such a large lag (years or even decades) in the effects of those policies that it would be difficult for the typical non-economist to really tell to assess, clarify who gets recognition for what.

However, politics cannot explain all of this. Check out this graphic:

I love the crossovers that take place on Inauguration Day. Really? The economy is dramatically worse in the fourth week of January than the third week? Are voters really that stupid? (Don't answer that.) The reason I'm including this chart is because something happened starting in early 2020 that appears to have lowered consumer sentiment to a “new permanent plateau.” Regardless of whether you lean politically to the right or left, the numbers are 20% lower than they should be.

More information here:

Why you should ignore the financial media

The impact of the pandemic on the US economy

Well, we all know what happened in 2020. We ran out of toilet paper. The cause of this economic misery is clearly dingle berries. Oh wait, correlation is not causation. But as of 2020, a few things have happened that could explain all of this. Global economic output fell dramatically. Although this decline was extremely temporary, it was frightening. Just ask your favorite joint surgeon, whose “elective” cases have all been put on hold for months. We have lost a lot of trust in our economy, in our governments and in our scientists. I think that had a significant effect that continues.

Inflation peak

I think a bigger problem than the pandemic itself was our response to it. The Fed (and similar institutions around the world) have opened the taps too wide and left them open for too long. Well, I don't blame them. It's hard to get it exactly right, and I think it's better to err on the side of inflation than on the side of deflation. But in hindsight, they obviously screwed up, at least towards the end. And in the end we had inflation of up to 9%.

Most adults and all young people had never experienced high inflation before. I am almost 50 years old. I have no practical memory of the stagflation of the 1970s. I don't remember sitting in gas pipes. I never had an 18% mortgage. For most of us, seeing interest rates rise 4% in a year was a once-in-a-lifetime experience. It was crazy. Even our bonds lost 10-15% of their value. This makes people really pessimistic about the future.

“I’m finally getting some savings together, but now everything costs twice as much!” you might say. The poor consumer sentiment is probably partly related to this traumatic economic shock, although inflation has now moderated (although certainly not the other way around; we are seeing disinflation, not deflation). In fact, the Fed believes that consumers simply haven't gotten used to the new higher prices we're paying.

Real estate crisis

good economy or bad economy

Perhaps the worst part of our current economy is the housing affordability crisis. Many people, especially young people, don't feel like they will ever be able to buy a home. Rents have gone through the roof, but prices for new homes have also risen, although interest rates have quickly risen back to more “normal” levels. The main reason for this is the limited supply. We simply stopped building houses in 2008 and never really caught up. Even many people who already live in their own homes feel trapped by their low mortgages. You don't want to give up a 2.75% mortgage to get a 6.75% mortgage. The impact of most people's budgets most likely has an outsized influence on their sentiment toward the economy.

The end of freebies

Many free gifts have also been distributed in recent years. Student loan interest rates dropped to 0% and no payments were required. Business owners had their “free” PPP loans forgiven. Most other people got three rounds of stimulus checks. That's over now. And for those who need or want to borrow money, interest rates are 4% higher. Maybe it feels a little like the police 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 several contributing factors, but it's hard to say which are the most important. What I really want to know, though, is what people will think the next time the economy is truly 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 measures of economic resilience is historically wide? Comment below!

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