Americans feel better on economy. It鈥檚 taken a while.
The paradox has gone on for so long that it has become a clich茅: If the economy is so good, why do Americans feel so bad? This dourness even acquired a name: the 鈥渧ibecession.鈥�
But the bad vibes are dissipating, and optimism has returned.
On Friday, the S&P 500 closed above 5,000 for the first time. The unemployment rate has stayed below 4% for 24 months, a streak not seen in more than a half-century. On Tuesday, the U.S. Department of Labor reported that the annual inflation fell to 3.1% in January, although the number was higher than many economists expected.
Why We Wrote This
A story focused onA gap persisted last year between consumers鈥� dour mood and more upbeat data. But such gaps can close. Economists look at the role trust and optimism play in an economy鈥檚 health.
鈥淭his is a much more rosy scenario than my data had ever predicted,鈥� says David Blanchflower, economics professor at Dartmouth College in Hanover, New Hampshire, who made his reputation in Britain with early warnings about the 2008 financial crisis. 鈥淭he sentiment stuff predicted a hard landing, and we got a soft landing.鈥�
Many Americans are also scratching their heads. Over the past year or more, comparing consumers鈥� mood with data has sometimes felt like trying to figure out who鈥檚 kidding whom. Were people just not getting how good the economy really was 鈥� as inflation decelerated even while jobs continued to grow? Or were official numbers failing to reflect a reality that was bad and maybe about to get worse? Add in dueling political narratives about these issues, and it could feel hard to know which economic perspective to trust.聽
University of Michigan, U.S. Bureau of Labor Statistics, National Bureau of Economic Research
In recent weeks, however, the gap between mood and data has narrowed significantly. The University of Michigan鈥檚 Consumer Sentiment Index 鈥� which hit a record low in mid-2022 and remains below its historical average 鈥� has climbed 29% since November. That鈥檚 the largest two-month rise in more than 30 years.
One lesson of these times may be that perception gaps don鈥檛 last forever. Yes, sometimes people can swing too far toward pessimism, and at other times what economists call 鈥渁nimal spirits鈥� can propel optimism into dangerous recklessness. But quite often people鈥檚 attitudes line up pretty well with the story told by official numbers.聽
The alignment is important because in years when the numbers and sentiment agree that times are good, more growth is almost always assured. 鈥淭he correlation is huge,鈥� says Michael Lewis-Beck, professor of political science at the University of Iowa. Only once since 1948 has that combination failed to lead to higher economic output. Consumers usually pull back their spending when they feel uncertain, or pessimistic.聽
Today, while risks remain, economists say the threat of recession really has receded. And the more trust consumers have in good times, the more likely those good times will continue, they add.聽聽
One of the big mysteries of this era is why the 鈥渧ibecession鈥� didn鈥檛 lead to recession. Plunging consumer confidence has accurately predicted six of the last six U.S. recessions, Dr. Blanchflower says. This time, consumers kept spending despite their dour outlook, which kept the economy humming. No one鈥檚 quite sure why.
Many economists suspect that the shock of the COVID-19 pandemic scrambled the picture, serving as a mental weight on the national psyche that somehow did not affect American pocketbooks. Or perhaps the recession is simply delayed.
Others point to the recent bout of high inflation 鈥� which consumers experienced daily when they shopped for groceries, bought office supplies, or priced new cars 鈥� as a pessimism enhancer.
鈥淭he recent experience strongly suggests that inflation 鈥� or people鈥檚 perceptions of inflation 鈥� plays a more powerful role ... than we had known before,鈥� says Christopher Carroll, professor of economics at Johns Hopkins University and research affiliate with the National Bureau of Economic Research.
Still others suggest surveys increasingly reflect a society riven by persistent inequality and lagging upward mobility.聽
鈥淚 don鈥檛 think we should be as surprised as we are by the disconnect between good, economic indicators on average, and how people who are either in despair or very vulnerable economically rate what鈥檚 happening,鈥� says Carol Graham, a senior fellow for economics at the Brookings Institution and author of the 2023 book 鈥淭he Power of Hope.鈥� 鈥淲hat I can tell you would definitely increase happiness is more security. ... Compared to other countries, we don鈥檛 have very generous safety nets.鈥澛�
The 鈥渧ibecession鈥� has also spilled over into politics. Supporters of Joe Biden worry the president is getting little credit for an improving economy.
It鈥檚 long been true that voters whose candidate occupies the White House are more sanguine about the economy than those whose party is out of power. And Americans are more politically polarized than before, says Joanne Hsu, director of the Surveys of Consumers at the University of Michigan in Ann Arbor. Still, actual economic conditions continue to affect consumer optimism, she adds. 鈥淓ven Republicans are at their highest [level] in two years.鈥�
Plenty could upset the new optimism. Some analysts worry that inflation could prove more intractable than expected. The layoffs now piling up in the technology sector could spread. Global issues including a slower Chinese economy or a wider Middle East conflict could tug against growth.
But for the moment, pay hikes are again outpacing inflation, which means Americans have more money to spend, despite high prices. The Federal Reserve, which was tightening financial spigots in 2022 and 2023 to tame high inflation, is now talking about loosening them by cutting interest rates later this year. And the United States appears on the cusp of accomplishing something rare 鈥� a slowdown in inflation without a job-destroying recession, a feat known as a soft landing for the economy.
