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A deep and enduring “vibecession” – Partisan differences are increasingly dominating perceptions of the economy.
By almost every metric, the US economy is doing quite well at the moment. There are many ways to evaluate economic vitality. The most obvious is the headline unemployment rate, which was used throughout the Great Recession to monitor the (slow) recovery. Today, though, unemployment is hovering near record lows at <4%.
Beyond this, there are somewhat nerdier, more technical measurements that still capture important aspects of the economy. Things like inflation, GDP growth, and the stock market. All of these indicators are somewhere between “good” and “great”. Inflation has come way down and is now around 3.7%. Core inflation, a better measurement of long-term inflation that excludes volatile commodities like gas prices, is even lower at around 2.5%, essentially hitting the Fed’s 2% target. GDP growth is surprisingly high for Q3 at 4.9%. The stock market is also doing fairly well, with the S&P500 being less than 10% off its all-time high at the end of 2021 and being well-above the pre-COVID high in Jan 2020.
Drilling even deeper, at this point you start to get the indicators people and the media can “fish” for in order to find bad news. Things like median wage growth, wealth inequality, and prime-age labor participation rate. The thinking with these metrics is that even if the more commonly cited stats are doing well, they might not paint a full picture. For instance, if the economy is growing but the rich are eating all the gains, then things like wage growth and inequality can show how most people aren’t benefitting. Likewise, if the unemployment rate has fallen because people have become discouraged and just don’t bother looking for work any more, then labor participation can show what’s really going on. The steelman of these metrics is that they can be helpful in painting a fuller picture, although in practice I’ve often only seen them used when people are willing to use motivated reasoning to paint the economy as underperforming (e.g. politicians, doomers, or the media just trying to create a story). That said, even by these metrics the US economy is doing well. Median wage growth is very high and is well-above inflation. Regular Americans are getting richer, and wealth inequality has fallen.. The prime age employment rate is also near record highs.
In spite of all of this though, many peoples’ opinions of the economy remain in the dumps. The consumer sentiment index has recovered only slightly from its record low a few months ago, but is still barely better than during the worst parts of the Great Recession. What gives? Well, there’s quite a bit of evidence that it’s just partisan emotional expression, i.e. “vibes”. There’s plenty of data showing that Americans tend to rate the national economy as being much worse than their own personal financial circumstances. Kevin Drum has some evidence that this national-personal split is mostly being driven by Republicans. 71% of Democrats and 57% of Republicans say the economy is doing well in terms of their personal situation. But in terms of the nation as whole, 58% of Democrats and just 5% (!!!) of Republicans say the economy is doing well on a national scale. So you have this goofy scenario where Republicans across the country say things are going well for them individually, but as a collective things must simply disastrous. Where is this “disaster” occurring? “Well, not here, but it’s surely happening somewhere”. The 5% mark is particularly interesting because it perfectly matches Republican’s approval rating of Biden. In other words, it seems like asking people how well the economy is doing is just a proxy for “what do you think of the current sitting president”. I’d doubt the numbers would correlate this perfectly all the time, but there’d still be a significant relationship. Whichever party doesn’t control the White House will see the economy in much more pessimistic terms.
Currently this is just applied to Republicans being pessimistic, but it’s almost certainly symmetrical. When Republicans eventually take back control of the presidency, it’s not hard to predict that Democrats will suddenly think the sky is falling in economic terms.
Thanks for this post. It made me stop and think about why I'm so pessimistic on the economy, and I think that my pessimism is, at best, only partially warranted. Here are my thoughts on why I think pessimism is still warranted, though not as doomy as previously.
Trust in elite institutions is deservedly low. The pandemic blew up any notion that global institutions were remotely concerned about the public weal when the well-being of PMC/Blue Tribe is at stake. The media and public watchdog groups are all-in on team Blue, so my expectation is that any information that looks bad for Blue will be suppressed if possible, excused if not possible. Any information that trends well for team Blue will be given more weight than it is actually due. If there are black swans out there right now, we're intentionally trying not to notice them.
The pandemic flipped the switch on remote work being preferable for many jobs. For the industries I'm privy to, this largely meant divesting from expensive investments in blue cities and seeking out qualified employees in lower cost markets. This was a substantial increase in the earning potential in more depressed parts of the country at the cost of eliminating a lot of jobs in more expensive cities. So, it's a net increase in wages across the country, but still incredibly disruptive to the workforce left behind in the big cities.
This is less analytical, but still real. The housing crisis took place in 2006-2007 when a wave of ARMs kicked in defaults went through the roof. The smartest banks, with the help of the rating agencies, did everything they could to delay the crash in order to divest from the toxic assets before the crash landed, which ended up putting off the crash until mid-2008.
We blew up the economy from 2020-2021, deficit financing massively distortionary unemployment benefits for almost 18 months, losing track of hundreds of billions of dollars in fraudulent loans, and, thus far, we haven't really paid much of a price. Sure, the inflation figures and supply chain disruptions in the aftermath are annoying, but my gut says that the piper is yet to be paid, and the longer we put it off, the worse it will be.
Consider the current residential real estate market. The high interest rates are keeping people from selling their current homes due to being unable to afford to afford a new 8.7% mortgage payment under current market rates. That means there is a constantly increasing backlog of inventory that is just waiting for a drop in interest rates in order to sell. Once that rate drop comes, a glut of new inventory will drive prices down. Much of the median increase in net worth is driven by the inflated real estate market, and that will suddenly evaporate while the current highs in consumer debt will remain, and people who are buying currently will be underwater. My cynical side expects to see this in early 2025.
I really hope that you're right and I'm wrong.
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