An announcement from the Federal Reserve about the future of the federal funds rate is not the type of news that typically factors into analysis of public opinion and the economy. Typically, analysts look at numbers like gross domestic product and unemployment, not something as arcane as a federal funds rate.
But this is not a normal economy, and public opinion about the economy was not normal either.
For two years, the public has claimed that the economy is doing poorly, even though it appears healthy by many traditional measures. This has sparked a heated debate about whether the public's views are driven primarily by concrete economic factors like high prices or something non-economic – like a bad “mood” generated by social media memes or Fox News.
The Fed's forecast on Wednesday that it will cut interest rates three times next year probably won't inspire TikTok memes, but it's exactly the kind of event that could ultimately resolve this debate one way or another — with important ones and potentially crucial consequences for the 2024 presidential election.
To get to the heart of the issue at the heart of this debate, high prices don't seem to fully explain why voters are so upset about the economy.
Yes, voters are upset about high prices, and prices are indeed high. This easily and even completely explains why voters consider this economy to be mediocre: In the age of consumer sentiment data, inflation has never risen this high without consumer sentiment being below average and usually well below average. This part is not complicated.
But it's harder to argue that voters should believe the economy is completely terrible, even taking inflation into account. At the start of 2022, I estimated that consumer confidence, after accounting for prices and real disposable income, was at least 10 to 15 percentage points worse than would be expected historically.
I could go over the numbers, but instead consider this: The trough in consumer sentiment in 2022 wasn't just low; It was a record low for the index dating back to 1952. That's right: Consumer sentiment in 2022 was worse than in the 1970s, when higher inflation lasted much longer, and worse than in the depths of the Great Depression.
Other measures of consumer confidence don't show the situation quite as badly, but even the rosier readings show that Americans' economy is about as shaky as it was 15 years ago, when mass layoffs caused unemployment to double net worth to 10 percent of private households fell by $11.5 trillion. You don't need fancy math to see that there's something left to explain.
The two sides of this debate disagree about why exactly the public is so angry about the economy.
The case for vibes
One side argues that public opinion about the economy is now determined by non-economic factors and, in particular, by sentiment or a prevailing mood that shapes our perception of reality. From this perspective, the mood today is so acrimonious and sullen that public opinion is no longer responsive to material economic reality: the “mood” is bad, so voters cannot see that the economy is good.
Strictly speaking, there is no reason why sentiment cannot be based on tangible economic conditions – such as the loss of stimulus checks – but in practice it is an argument for how non-economic factors prevent voters from appreciating the economy. These factors could include conservative media, cynical social media, the mental health crisis, a pandemic hangover, President Biden, or really anything else that could dampen Americans' economic spirit.
There might well be something to the vibes argument. There could even be a lot behind it. But there just isn't much evidence for it. This site fundamentally bases its argument on a diagnosis of exclusion: If we don't believe the economic argument, then it must be non-economic – and if it is non-economic, it can really be anything. The power of vibrations here is inherently indeterminate, and the limitless explanatory power of a theory without evidence should give pause to any serious thinker.
If this side of the debate is right, the consequences for Mr. Biden are pretty dire. From this perspective, the economy should help him, but instead it will probably be a major burden. An 81-year-old white male moderate might be the worst Democrat to turn the tide on TikTok.
The fall of the economy explains everything
The other side of the debate argues that the explanation is fundamentally economic, but that the factors that weighed on consumers are not accurately captured by standard economic statistics.
This side of the debate means two types of unfavorable economic factors. One is economic dysfunction – some basic things have become more difficult. It's harder to hire someone. It's harder to get a loan. It's more expensive to buy things. At times it was impossible to purchase things due to supply chain bottlenecks. It's harder to buy a house. It's harder to sell a house. If you wanted to carry out such economic activities, you should have done so before autumn 2021.
It is easy to see how these challenges could impact economic perceptions, and these issues can be overlooked in economic statistics. The usual data measures the extent of economic activity, not its ease. The fact that people still have the resources to spend, hire, and buy does not change the fact that voters can rationally conclude that the economy is bad if it makes it harder for them to carry out economic activities.
The other negative economic factor is pessimism about future growth. A statistic like unemployment says a lot about today's economy, but little about tomorrow's economy. Expectations of future growth are an important component of consumer confidence indices, and for good reason: the desire to turn money into more money is fundamental to American capitalist culture. Here, too, there were reasons to expect limited economic growth or even a recession. Investors expected this, as the yield curve shows. There was even a reasonable assumption that the Fed would be so focused on slowing inflation by keeping interest rates high that a recession would be all but inevitable.
Contrary to the “vibes” theory, there is a lot of evidence for these different phenomena. They also fit into the framework of consumer confidence depending on specific economic conditions.
But whether these non-traditional economic issues taken together explain what's going on is much harder to say. They may explain a lot, and perhaps even everything, but it is impossible to prove empirically without some precedent for today's economy in the age of modern consumer confidence data. There has simply never been a time when unemployment has been so low and prices have risen so much, not to mention all of these additional twists like supply chain bottlenecks and expectations of a recession.
It can be said that the theory of concrete economic problems will be put to the test as economic reality improves, and that the time may finally have come.
The economy seems to be improving
After several months of stubborn inflation, rising gas prices and interest rates, and a falling stock market, last month brought excellent economic news. The stock market has risen nearly 15 percent since the New York Times and Siena College surveys were conducted in late October. The inflation trend looks good. Mortgage interest rates are falling. Gas prices have fallen. Once-skeptical economists have declared that a “soft landing” is coming. And now the Fed is forecasting rate cuts, promising growth, confidence in lower inflation and an eventual return to a more normal economy.
All in all, the major economic hurdles could soon disappear. If this is the case and the material economic side of the debate is correct, consumer confidence could recover quickly. And Mr. Biden's re-election chances would improve at least to the extent that the economy, rather than another issue like his age, is responsible for Donald J. Trump's lead in the polls.
While it's too early to tell, there are certainly signs that consumer confidence could be improving. For one thing, it has already done so. Overall, consumer confidence has increased by almost 20 points since inflation peaked in summer 2022. This rate of improvement is consistent with previous strong periods of economic growth, such as the 1990s. The monthly pattern of consumer confidence even appears to be consistent with the news: last month's strong economic data was accompanied by a rebound in consumer confidence that reversed the declines of the last four months, when economic news was worse than in the summer.
This is what we would expect if real economic factors were boosting consumer confidence, although this is not enough to refute the sentiment theory. To put the vibe argument aside, we would have to recognize that the gap between expected and actual consumer confidence is closing. As fears of a recession subside and a more normal economic environment returns, there may still be enough time to close that gap before Mr. Biden runs for re-election.
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