- Recent economic data are encouraging, but Americans still regret the recovery.
- “Vitality” results from weakening labor force, high inflation and falling real wages.
- If this situation continues, the bad mood could dampen consumption and drag the economy into a real recession.
The economic recovery from the coronavirus recession is among the fastest in modern history.
It’s also one of the weirdest. Americans are feeling depressed about the state of the economy, citing high prices and slowing economic growth. But the indicators that have been used to track the health of the economy for decades show undeniable signs of strength. In July, U.S. employment hit a record high, inflation began to fall, and wages continued to rise at a faster-than-usual pace.
The zeitgeist already has a name to match its quirky nature. It is “vibration”. Markets and economics blogger Kayla Scanlon coined the term in a June 30 Substack post about how rising prices created bad vibes and overshadowed generally strong economic data. A healthy employment report doesn’t mean much to workers if their wallets get lighter by the day.
This is different from a normal economic recovery. Recovery from the recessions of 2001 and 2008 saw the labor market recover slowly, with inflation hovering around 2%. The opposite is happening today. Jobs recovered at the fastest pace in decades, but inflation is close to his 40-year high. The country is also grappling with an unusually lingering labor shortage as childcare pressures and virus concerns keep workers sidelined. Simply put, the United States is in uncharted economic waters.
There is also great uncertainty about when and how quickly inflation will improve, and whether that cooldown will require recession and widespread unemployment. The road ahead is uncertain for the most seasoned economists, let alone the average American, which contributes to a bad mood, Scanlon said.
“The only certainty is uncertainty, the only certainty is the lack thereof, and the only way forward is to blindfold,” Scanlon wrote.
The United States is not in recession, according to the National Bureau of Economic Research, the group of economists who determine when recessions begin and end. But the bad mood among Americans indicates that there are serious problems in the recovery process.
The ‘wedge’ that protects Americans from inflation is crumbling
Americans are unhappy with the economy, but their finances are still holding up relatively well. Staying. Despite soaring prices and falling real wages, the average household retains about the same financial power it enjoyed in early 2020.
However, it is unlikely that it will continue. The indicator has been on a downtrend since last summer, being pulled down by rising inflation and less stimulus. The cushion that has protected Americans from soaring prices is now taking its last steps.
Ahrend Kaptein, global head of economic and strategic research at UBS Investment Bank, said at a press conference on July 20 that positive disposable income is creating a “historically very rare” wedge between inflation and spending. and said it continues to recover. But that gap won’t last forever.
“It will probably start to fade in the next few quarters and then the two will converge,” Kaptein said, adding that “it’s like a race against the clock” to bring down inflation before households get even worse. rice field.
Jobs are everywhere, but the power of workers is fading
The Biden administration, the Federal Reserve, and countless economists have highlighted the rapid recovery in the labor market as a sign that the economy is far from recession. But a closer look at the employment context reveals many other reasons why Americans feel bad.
For one thing, job seekers aren’t enjoying the same demand we saw in 2021. Companies that previously had little trouble attracting job seekers began offering signing bonuses, free meals, and even free iPhones to new hires.
Those perks are now gone. Slowing economic growth and rising interest rates have put the brakes on many companies’ hiring plans, wiping out the benefits of a labor-demanding economy.
Those who survived the pandemic are losing in their own way. Inflation eased until July, but wage growth still lags behind rising prices. Real average hourly earnings reached $32.27 last month, down from his February 2020 high of $32.56.
Brett Ryan, senior US economist at Deutsche Bank, told an insider, “Consumers are very happy with the job market in terms of finding jobs, but they are not feeling well about inflation, which is outpacing income growth. “It’s like, ‘I have work to do, but I’m running as fast as I can to stay in place.'”
The labor shortage, which was the driving force behind the rise in wages, is also being resolved. Job openings fell to 10.7 million from 11.3 million in June, the biggest drop in a month since the recovery began. Employee turnover has also slowed, suggesting the employment environment is not as attractive as it has been in recent months.
“A slowdown in the labor market is likely to result in higher unemployment, which is being driven by higher interest rates,” Ryan said.
Bad vibes for Americans endanger still-fragile economy
If the bad mood among Americans was just an emotion, there wouldn’t be much to worry about.
The thesis looks like this: Private consumption accounts for about 70% of overall activity. This is a key driver for economies recovering from the pandemic recession. Spending has remained strong for him through 2022, but as real disposable incomes continue to decline, Americans will feel pressure to shop less to maintain their savings.
If inflation falls sharply and wages continue to rise at a strong pace, disposable incomes could recover and spending could stabilize, UBS’s Kaptein said. If inflation continues, spending can slip into negative disposable income. Economists said Americans could plunge into a consumer-driven recession as they sharply cut back on spending.
Ryan said a weakening labor market and its effect on American moods could also trigger a recession. A slowdown in household spending “usually requires a shock” and a “significant deterioration in the labor market” is enough to make Americans feel worse and “turn sentiment into reality.” There is a possibility.
July’s inflation report shows the U.S. is on the right track, but the bad mood among Americans poses a major threat to a still-partial recovery unless inflation cools down quickly. There is a possibility.