The Recession That Wasn’t and Our Bad Vibes
Americans hate the economy, but say they're doing just fine. They think we're in a recession as the Dow Jones hits record highs. How’d all this happen?
Prominent pundits Nate Silver and Will Stancil have spent days locked in a debate over why the American public feels so negatively about the economy. Their dispute is a microcosm of the broader economic conversation being had among those left-of-center. Stancil attributes the public’s negativity to general bad vibes about the economy being cultivated by a pessimistic and entitled media class, despite the fact that the vast majority of working people and macroeconomic indicators are doing well or at least better than before. Stancil notes that:
One of the best explanations of the vibecession [a portmanteau of the words vibes and recession] is that the people sitting at the control panels of basically every institution capable of creating broad public narratives are doing much less well than the average worker.
Silver has taken umbrage with this, attributing economic pessimism to real economic conditions —like the impact of inflation— while also conceding that “what drives voter perceptions about the economy is kind of indeterminate… We’re all just guessing.” With that in mind, I have a pretty reasonable guess to put forward.
The seemingly obvious answer to why people feel pessimistic is that prices have gone up and that higher interest rates make the cost of housing, cars, and credit more expensive. However, these issues alone provide an inadequate explanation for the national malaise. A recent Harvard poll of Americans between ages 18-29 found that while 70% of young people feel that the American economy is bad or very bad, 65% of them rate their own financial situation as good or very good. This trend is not confined to young people. Surveys of the American public generally have similar results. In a recent phone survey of over 1,800 Americans, 71% of Americans described the state of the economy negatively, while 60% described their financial situation as “good or excellent.” Clearly, people are not judging the economy based on their own experiences in it. So what gives?
While some of this disparity can be attributed to the role of partisanship —Republican sentiment regarding the economy dropped precipitously immediately following Biden’s inauguration— and a general sense of exhaustion following the pandemic, Stancil is correct that the media class is not without culpability— neither are economists.
Since 2021, economists and journalists have continually and wrongly predicted an oncoming recession. At the end of 2021, a Forbes piece warned businesses to make “contingency plans to be ready for the nearly-inevitable recession.” Bloomberg asked, “Is the U.S. Already in Recession?” Hint: The answer was no. A Council of Economic Policy Research blog explained that “a global recession is inevitable in 2023,” noting that:
Economic downturns are not as unpredictable as we once thought. There is mounting evidence that the expectations of consumers, workers and employers predict economic downturns, sometimes 12 to 18 months ahead…this column argues that expectations data for the US suggest the country is entering recession about now.
Twelve months out, this prediction was not vindicated, but The Economist picked up the torch, arguing that “a global recession is inevitable in 2023.” Other headlines blared that “Around 90% of CEOs believe a recession is coming. Half of them are already planning for layoffs.” (Layoffs in 2023 were largely confined to the technology sector.) Jamie Dimon warned that we were heading towards “something worse” than a recession. At the end of 2022, a Wall Street Journal survey found that almost two-thirds of economists predicted a recession within the next twelve months. Well, 2023 is nearly over, and that recession still hasn’t come.
For a brief period in the middle of 2022, some (mostly conservative) commentators attempted to claim we were in a recession. They uniformly cited the fact that real GDP growth dipped below zero for two consecutive quarters — a commonly used but by no means perfectly accurate indicator of a recession. (This would result in Fox News spending a solid month asking any liberal they could what the definition of a recession was.) However, this occurrence was the result of a temporary surge of inflation rather than a genuine economic slowdown. When real GDP growth was revealed to be positive the very next quarter, conservative media ceased talking explicitly about a recession as they would be forced to admit that either they had either made a mistake claiming we were in a recession or that it was already over and that Biden had somehow led us out of it in record-breaking time.
But what happens when the nation’s top economists, CEOs, and newspapers spend two years telling the public a recession is imminent? Well, the public believes them. A Bankrate survey published earlier this month found that nearly sixty percent of Americans believe we are currently in a recession! Mind you, the unemployment rate has been at or below 4% for 2 years straight —with Black and Hispanic unemployment hitting record lows. Real wages have been climbing steadily for the last six months, though are roughly flat over the last two years. Prime-age labor force participation is at highs it hasn’t reached since before the Great Recession. Monthly reports of jobs added continue to outperform expectations most months. In fact, not only have all the jobs lost from the pandemic been recovered —a feat that was accomplished by June 2022— an additional 4.72 million jobs have been added to the economy (compared to a total of 6.73 million jobs added between Trump’s inauguration and the peak of the economy prior to the coronavirus.) Hell, this Friday the Dow Jones hit an all-time high. But how could most Americans take stock of these facts when most never hear them and are instead constantly being terrified by the prospect of an oncoming recession?
The pessimism of the media and economists is starting to crack. The Wall Street Journal’s latest survey of economists puts the probability of a recession at less than 50%. So far, there has been insufficient reflection on how so many people managed to get their predictions so wrong. Undoubtedly, some observers will just endlessly wait for the next recession and claim vindication when it inevitably arrives, even if that’s several years from now. After all, if you predict a rainstorm every day, eventually one will come. However, most of these observers predicted a recession in 2022 or 2023 and they were wrong for several reasons. As noted in a great piece in The New Yorker, consumer spending held up better than expected, thanks to rising real wages, the stimulus of Biden’s American Rescue Plan, and the fact that many consumers locked in low-interest-rate loans before Fed Chair Jerome Powell hiked rates.
But there’s more to the story. The media and economists are now touting the strong likelihood of a “soft landing,” the idea that Jerome Powell, by carefully calibrating interest rate hikes could cool inflation and avoid a recession. That’s their working assumption, but there’s no evidence that that’s what happened here. Early empirical evidence suggests that inflation cooled off not because of declining consumer demand, but because of increasing supply— the result of working out pandemic-era supply chain kinks, strong business investment, and (at the margins) better antitrust enforcement. Yes, the economic establishment incorrectly gauged the propensities of consumers to spend and firms to invest. More importantly, their entire macroeconomic model for assessing how to fight inflation —which was built on triggering a recession to drive down prices— was wrong. The results of trusting that model could have been far more catastrophic if not for the resilience of consumer demand in the post-pandemic economy. (Remember, Former Treasury Secretary Larry Summers spent 2022 calling for 10 million Americans to lose their jobs to combat inflation!) While failing to inflict real harm on the economy, this model still managed to tank Americans' perception of the economy by endlessly telling them that a recession was both necessary and imminent.
All of this is not to say that the economy is perfect and that Americans have merely been duped by the media. People have genuine reasons to be unhappy. Inflation is finally slowing down, but many Americans have not yet gotten used to the higher price level— or noticed their wages rising to adjust to it. More longstanding concerns about the economy also persist, including the prevalence of homelessness, the horrific nature of our healthcare system, and the unaffordable cost of childcare for working parents. For a lot of Americans, these problems were less severe during the pandemic, as the government took more serious action to address them. It’s easy to lose sight of these issues as they surely don’t drive day-to-day vibes and nobody’s expecting Biden or Congress to take bold action to address them, but surely doing so would bolster optimism regarding the economy by increasing disposable household income.
There is no sign that this pessimism will quickly go away. Economic fundamentals are not going to get much better. After all, many of them are already better than they ever have been. It’s unlikely the media will change its tune either. Conservative media will never give Biden credit for improving the economy and liberal media is far too concerned with being accused of partisanship or of ignoring the plight of struggling Americans to provide an objective view of the economy. To overcome this attitude before the 2024 election, Biden must 1. Pass some progressive economic policies that are broadly popular 2. Continue breaking economic records that are too astounding for the press to ignore or 3. Get far better at messaging on his achievements. As a matter of fact, why not do all three?
I think Americans are just more attuned now to the reality that our individual economic fortunes are often a temporary phenomenon, that is only marginally related to things like personal work ethic and merit. Living through multiple recessions and listening to major economists plead for higher unemployment, kind of gives one those perpetual Hunger Games vibes, even if for the moment your monthly budget comes out alright.
I'm also curious about the families who for a brief time received the extended child tax credit... that extra $3000 (or $3600 depending on age) a year per child is roughly equivalent to getting a raise of $1.44 an hour at full time employment... for those working part time jobs, it was even more significant. I suspect for a lot of those families (low wage earners with kids) the end of the extended tax credit hasn't been noticeably offset by wage increases since it's expiration. They had a taste of what it would be like to NOT being raising kids in quite so much poverty.
Maybe these economists and people like you who don't have real jobs would do good to live like an average person for minute. How can you be so out of touch? You people are useless.
The explanation isn't that complicated. Although inflation is down, prices remain very elevated while real wages have only started to creep up as of recent. Also debt is at record highs, savings have been depleted by the inflation that they government refused to do anything about, and housing has gotten insanely unaffordable.