Vibes, the economy and the elections

An announcement from the Federal Reserve about the future of the funds rate is not the kind of news that normally plays a role in analyzing public opinion and the economy. Normally, analysts look at numbers like gross domestic product and unemployment, not something as arcane as the federal funds rate.

But this is not a normal economy, and public opinion about the economy has not been normal either.

For two years, the public has said the economy is doing poorly, even though it appears healthy by many traditional measures. This has led to a fierce debate over whether the public’s views are mainly determined by concrete economic factors such as high prices or something non-economic – such as a bad ‘vibe’ created by memes on social media or Fox News.

The Fed’s prediction Wednesday that it will cut rates three times in the next year probably won’t generate any TikTok memes, but it’s exactly the kind of event that could ultimately resolve this debate one way or another — with important and potentially decisive consequences for the period of 2024. presidential elections.

To get straight to the heart of the problem underlying this debate: high prices don’t seem to fully explain why voters do this angry about the economy.

Yes, voters are angry about the high prices, and the prices are indeed high. This easily and even completely explains why voters think this economy is mediocre: In the age of consumer confidence data, inflation has never risen so high without driving consumer confidence 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 downright terrible, even after taking inflation into account. I have in early 2022 estimated that consumer confidence was at least 10 to 15 percentage points worse than one would expect historically, taking into account prices and real disposable income.

I could run through the numbers, but consider this: the low point for consumer confidence in 2022 wasn’t just low; it was a record low for the index dating back to 1952. That’s right: Consumer confidence in 2022 was worse than in the 1970s, when higher inflation lasted much longer, and worse than during the depths of the Great Recession.

Now other indicators of consumer confidence do not show Things are so bad, but even the rosier measures show that Americans are about as negative about the economy as they were 15 years ago, when mass layoffs caused the unemployment rate to double to 10 percent and household net worth increased by $11.5 trillion decreased. You don’t need complicated math to see that there is still something to explain.

The two sides in this debate disagree on why exactly the public is so sour about the economy.

A plea for vibrations

One side claims that public opinion about the economy is now determined by non-economic factors, and in particular by vibrations, or by a prevailing mood that colors our perception of reality. In this view, the atmosphere today is so caustic and harsh that public opinion is no longer responsive to material economic reality: the “atmosphere” is bad, so voters cannot see that the economy is good.

Strictly speaking, there’s no reason why feelings can’t be based on tangible economic conditions – like the disappearance of stimulus checks – but in practice this turns out to be an argument for how non-economic factors prevent voters from valuing the economy. Those factors could be conservative media, cynical social media, the mental health crisis, a pandemic hangover, President Biden or basically anything else that could dampen Americans’ economic spirits.

There might be something to the vibes argument. In fact, there could be a lot going on. But there just isn’t much evidence to support this. This side bases its argument fundamentally on a diagnosis of exclusion: if we don’t accept the economic argument, then it must be non-economic – and if it is non-economic, it could really be anything. The power of vibrations here is of course indefinite, and granting unlimited explanatory power to a theory without proof should give any serious thinker some pause.

If this side of the debate is correct, the consequences for Mr. Biden are quite bleak. In this view, the economy should help him, but instead it will probably be a major drag. An 81-year-old white moderate man might be the worst possible Democrat to change the mood on TikTok.

The argument for economics explains everything

The other side of the debate argues that the explanation is fundamentally economic, but the factors that drag consumers down are not neatly captured in the usual economic statistics.

There are two types of adverse economic factors this side of the debate has in mind. One of them is economic dysfunction: some fundamental things have become more difficult. It’s harder to rent. It is more difficult to get a loan. It’s more expensive to buy things. Sometimes it was impossible to buy things due to supply chain shortages. It’s harder to buy a house. It’s harder to sell a house. If you wanted to undertake this type of economic activity, you should have done so before autumn 2021.

It is easy to see how these challenges can affect economic perception, and these problems can be missed by economic statistics. The usual data measures the volume of economic activity, not its ease. The fact that people still have the means to spend, rent, and buy money does not change the fact that voters can rationally conclude that the economy is bad if it makes it more difficult for them to engage in economic activity.

The other type of unfavorable 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 a key component of consumer confidence indexes, and for good reason: the desire to turn money into more money is fundamental to American capitalist culture. Here too, there are reasons to anticipate limited economic growth or even a recession. Investors expected this, as shown the yield curve. In fact, there was 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 as a function of concrete economic circumstances.

But whether these non-traditional economic problems add up to explain what’s going on is much harder to say. They can explain a lot and maybe 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 stayed this low and prices have risen so much, let alone with all these added twists like supply chain shortages and expectations of a recession.

What can be said is that the theory of concrete economic problems will be put to the test once economic realities improve, and that moment may finally be near.

It looks like the economy is improving

After a few months of persistent inflation, rising gas prices And interest ratesand a declining stock market have brought excellent economic news over the past month. The stock market is up nearly 15 percent since the New York Times/Siena College polls in late October. The inflation trajectory looks good. Mortgage interest rates are falling. Gas prices have fallen. Once-skeptical economists have declared that a “soft landing” appears imminent. And now the Fed is predicting rate cuts, which heralds growth, confidence in lower inflation and ultimately a return to a more normal economy.

Put this together and the major economic barriers could be about to fade away. If they do, and the material economics of the debate holds true, consumer confidence could quickly recover. And Mr. Biden’s re-election chances could begin to improve, at least to the extent that the economy, rather than some other issue such as his age, is to blame for Donald J. Trump’s electoral struggles. ahead in the polls.

Although it is still too early to make any statements about this, there are certainly signs that consumer confidence could increase. First of all, that has already happened. Overall, consumer confidence has risen almost 20 points since inflation peaked in the summer of 2022. That pace of improvement is consistent with previous strong periods of economic expansion, such as in the 1990s. The monthly pattern of consumer confidence even seems to be in line with the news: last month’s strong economic data corresponded with a recovery in consumer confidence who has erased the decline of the past four months, when economic news was worse than during the summer.

That’s what we’d expect if real economic factors were driving consumer confidence, although it’s not enough to disprove the vibe theory. To eliminate the “vibe argument,” we need to start seeing the gap between expected and actual consumer confidence narrowing. If recession fears subside and a more normal economic environment returns, there may still be enough time to close that gap before Mr. Biden seeks re-election.