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The bad vibes economy

Jun. 8, 2022 VOX

This is perhaps not the best way to run a business, but it is indicative of the current mood — a lot of people have a sense that something’s just off in the economy, or it’s about to be. There’s this nagging sentiment that we’re in a precarious spot, that there’s some economic boogeyman lurking just around the corner.

This sense of dread is so pervasive that it might surprise you to hear that many aspects of the US economy are generally in good shape right now. The unemployment rate is low, and the labor market is strong. Job openings are at near-record levels, and many workers who want to find something better are doing so. Household and corporate balance sheets are strong. Business profit margins are coming down some but are not disastrous. The stock market is faltering, but the worst troubles seem to be concentrated to the high-flying tech sector that was bound to cool off a bit. Stock market investors are still much wealthier than they were five, 10 years ago. 

The elephant in the room is, of course, inflation, which is high and, for most consumers, just incredibly annoying. Rising prices are cutting into wage gains for workers. The average price of gas nationally was $4.91 as of June 7, climbing just as many Americans get ready to hit the road for the summer.

“Everything else is going swimmingly, but the inflation is painfully high. People can’t get around that, psychologically,” said Mark Zandi, chief economist at Moody’s Analytics. Add to inflation over two years of a pandemic, war in Ukraine, mass shootings, and political dysfunction, and it makes it hard to say you feel good about anything, including the economy. “It’s just a noxious brew that’s come together and is weighing very heavily on the collective psyche at this point.”

The Federal Reserve is tightening monetary policy to try to combat inflation, which could push the economy into a recession. Regardless, the breakneck pace of the recovery from the pandemic recession is slowing down.

The economy isn’t terrible, but a combination of factors make it feel like it is — and that it’s only going to get worse, even though that’s not at all a foregone conclusion.

Inflation, not fun

Inflation in the US is at levels the country hasn’t seen in decades, and people, frankly, hate it. A recent poll from FiveThirtyEight and Ipsos found that over half of the country says inflation is the most important issue facing the country, well ahead of issues such as political extremism, gun violence, and climate change. Pew found that 70 percent of Americans say inflation is a very big problem, with no other issue coming very close.“IT’S JUST A NOXIOUS BREW THAT’S COME TOGETHER”

Inflation can be really painful for consumers, especially on items such as food and gas that they can’t really skip buying. It’s also always staring them in the face in a way that other facets of the economy are not, at least not so obviously.

If you have gotten a raise over the past year — and many people have — it was likely a one-time thing. “It’s not like every week your boss is like, ‘Hey, we gave you another raise.’ With inflation, it’s a constant creep,” said Nick Bunker, economic research director at Indeed. Gas prices, in particular, are almost unavoidable, even if you’re not filling up your tank. “How many goods and services do we have where the price is prominently displayed on large signs?”

The inflation issue weighs heavily on how people perceive everything else to be going. Many members of the public appear to believe the country is already in a recession. That is very unlikely to be the case, though the economy did shrink in the first quarter of the year.

The way people say they feel about the economy doesn’t necessarily align with how you might expect them to if the country were in a dire economic situation. Consumers are still spending, though more appear to be dipping into their savings to do so (and it’s not clear if they’re taking home less due to inflation). In late 2021, a survey from the Fed found that Americans were reporting the highest levels of financial well-being since the survey began in 2013, even though their perceptions of the broader economy declined. The Atlantic’s Derek Thompson recently named the scenario a sort of “everything is terrible, but I’m fine” situation. 

The University of Michigan’s consumer sentiment index in May fell to its lowest level since August 2011, driven down by how consumers feel about conditions for buying houses and durable goods and their outlook about the future of the economy because of inflation.

“We’re at levels that would be consistent with a bigger recession,” said Claudia Sahm, a former economist with the Federal Reserve. “There is no way, given the labor market, given consumer spending, that right now we are in a recession.”

Sahm pointed out that last time consumer sentiment was so low, the US was in the midst of the debt ceiling crisis and still climbing out of the Great Recession, and there was turmoil in Europe. Essentially, a lot of things were bad. Now we’re in a similar scenario — people feel bad about a lot of things, which translates into how they’re feeling about the economy. Consumers are “just really pissed off about the world,” Sahm said. There’s still Covid, there is again turmoil in Europe, there’s growing anger over politics. Practically no one says they’re happy about the direction of the country. “When we think about the world, the economy, it’s not so separable.”

A recession isn’t for sure looming, but it feels like it is

In early June, JPMorgan Chase CEO Jamie Dimon warned an economic “hurricane” is on the horizon, citing the Fed shrinking its balance sheet and the Russia-Ukraine war’s impact on commodities prices in his reasoning. “Right now, it’s kind of sunny, things are doing fine, everyone thinks the Fed can handle this,” he said. “That hurricane is right out there, down the road, coming our way. We just don’t know if it’s a minor one or Superstorm Sandy.”

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