You’re not the only one confused about the economy. Even the experts are at a loss

In their roles as consumers, investors, and workers, ordinary Americans feel the country is at an economic tipping point, but without a clear picture of what’s next or how to prepare for it.

“Unless you’re a little confused about the economy, don’t pay attention,” said Harvard economist and former White House economic adviser Jason Furman tweeted last week.

Businesses are hiring, but production is falling. Consumers are pessimistic about the future, but they keep spending. The economy faltered when it should, and even the experts are looking for answers.

On Twitter, Glassdoor’s Senior Economist Daniel Zhao called the separation between the increasing number of people filing for unemployment and the almost static number of pending applications “strange”.
Federal Reserve Governor Christopher Waller called the disparity between rising employment and contracting output “strange” and the divergence in income and output data “a mystery.” in a recent webinar.
Even Federal Reserve Chair Jerome Powell sounded a bit taken aback in a Central Bankers Economic Forum last month in Portugal. “I think we better understand how little we understand about inflation,” he said.

With all this head-scratching from the pundits, it’s no wonder ordinary Americans feel anxious, exhausted, or discouraged — or all three.

“People have been tested over the past two years,” said Mark Zandi, chief economist at Moody’s Analytics. “The sentiment is consistent with a very nervous consumer.”

Reversing earlier gains, the Conference Board’s Leading Economic Index fell in the first half of 2022, suggesting near-term recession risks have increased. said the group. This was shown by data from the University of Michigan Consumer sentiment fell to a record low between May and June, but – perhaps surprisingly – that hasn’t resulted in a widespread decline in spending. Retail sales rose in May, likely reflecting rising inflation – and continued consumer spending power.

Although the personal savings rate has fallen significantly from its pandemic peak of 24.8% in May 2020, it has remained at 5.4% two years later and household balance sheets are still relatively strong.

“Sentiment has been a poor guide to spending lately; People with more than $2 trillion in excess savings combined may say they’re unhappy, but they can still go shopping,” said Ian Shepherdson, chief economist at Pantheon Macroeconomics, in a recent research note.

A trigger for our collective malaise could be a feeling of powerlessness, experts say.

“I think part of what’s going on is that there are certain parts of consumers’ budgets that they don’t have a lot of control over,” said George Loewenstein, professor of economics and psychology at Carnegie Mellon University. “Everyone seems to have the feeling that we are on a knife’s edge.”

Zandi referred to the price of gas as a special flash point.

“It cannot be overstated how debilitating $5 a gallon is,” he said. “Economists are always puzzled by how outsized gas prices play in people’s economic thinking.

Although Americans’ gas costs as a percentage of income are lower than they have been in the past when adjusted for inflation, they are paying more with every fill-up. “It’s gut wrenching financially,” Zandi said. “Nothing drives people crazier.”

Loewenstein also said that there was most likely a “novelty bias” at play.

“In general, people are pretty short-sighted. We tend to think that the future will be similar to the present,” he said. In other words, a recent history that includes skyrocketing inflation, pump pains, and higher borrowing costs can dampen enthusiasm, even if those pains turn out to be short-lived.

Part of the problem with generalizations is that the “American economy,” with a gross domestic product of around $25 trillion and 330 million people, is pretty much not a monolith. And at a time of sharp political and cultural polarization, it’s perhaps fitting that economic data seems to reflect both the best and worst of times.

“I think people’s perceptions are clearly colored by the prism they’re looking through,” Zandi said. “The political environment is highly polarized and that is reflected in the way people think about things.”

While that means economics students are likely to argue about that timeline for decades to come, experts say there are real consequences of using politics as a lens for financial decision-making.

“Most of the time, sentiment reflects the economy. It doesn’t create them — except at turning points,” Zandi said.

“If people get pessimistic, we will enter a recession. If people stay optimistic, the economy is likely to have a soft landing – but that creates a very unstable situation,” Loewenstein said. “The economy depends on expectations, and expectations depend on the economy.”

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