Consumer Vibes and Politics

The two are forever intertwined

Photo by Tim Green

There has been a lot of hand-wringing over how people feel about the economy. The economy itself is actually doing fairly well. Unemployment is low, jobs are being created, and GDP is increasing. People’s feelings about the economy, however, are bad. I still can’t believe this is possible, but consumer sentiment is lower now than in April 2020, when most of the world economy was shut down due to the Covid Pandemic. Various pundits have written about this at length, often attributing the problem to journalists who are making things seem worse than they are.

This became a high-profile X/Twitter war over the weekend, that began when Will Stancil, a somewhat well-known data analyst, posted this:

Nate Silver, arguably America’s most famous data analyst, reposted the above graph with the following comment:

I somewhat admire this guy's pluck but if median real wages have significantly declined during Biden’s tenure then that would surely explain why voters are mad about the economy and it's not just "vibes".

Things degraded quickly from there. Will responded aggressively, Nate implied Will is a bad-faith actor and Will said of Nate “he's a truly embarrassing pundit and got his website got taken away from him”. Other well-known economists like Justin Wolfers and Noah Smith and others entered the argument as well. Friends became enemies, enemies became friends, cats and dogs lived together, etc. All over whether consumers feel bad about the economy because of misplaced pessimism or accurately placed pessimism. If you have way too much time on your hands you can read the whole thing.

The largely unsaid backdrop of all this is the 2024 presidential election. If consumer sentiment stays low, regardless of the reason, Biden will likely lose the election. That, of course, means Trump would likely win. Anything involving Trump makes people lose their minds, making consumer sentiment for those in the vibes camp a shibboleth that must be “fixed”.

The frustrating thing about the whole kerfuffle was this is a great and important topic for honest debate. People feel bad about the economy. Is it because of “vibes”, because the economy is not doing well, or some combination of the two? Nate Cohn of the New York Times has a good rundown of the issue here. We have the technology to easily bring Will Stancil, Nate Silver, and several others together over the internet to have an honest debate about the issue. Unfortunately, X/Twitter isn’t conducive to this for several reasons. First, the short lengths of most posts don’t allow users to post nuanced opinions. Second, users can only see one reply at a time so it’s hard for a true back-and-forth discussion to develop. I discovered the vibes vs. economy argument after it had already blown up, and it took me some time to figure out who was responding to what and in what order. So when smart people have a disagreement everything devolves into people talking past each other. There were so many people taking facts out of context, blinded by their desire to win the argument rather than discover the truth. Grrr.

In this case, the Nate Silver camp is arguing that wages have been down since Biden took office, while the Will Stencil camp is arguing that wages have been up since 2019. These two facts aren’t mutually exclusive. In fact, they are both true! The actual argument should be what voters care about. If the typical American’s financial situation is better today than it was in 2019, but worse today than it was in 2021, will people generally view themselves as better off or worse off? And are those feelings “vibes” or rational thoughts based on declining economics?

Here is a good chart that supports the vibes case:

The dark blue line shows how the economy is doing. The light blue line shows consumer sentiment according to survey data. Until the Covid Pandemic, the lines track very well. Then, consumer sentiment drops like a rock. There’s clearly something very weird going on here. How can consumer sentiment be far lower in 2022 than it was in 2020? There’s some deep pessimism in the United States that does not make sense based on previous data.

The economic case is supported by the following graph:

This shows real disposable personal income per capita from January 2016 through July 2023. This shows that wages is likely not the best indicator to gauge how consumers are doing. Because of the Covid stimulus packages, for the first time in history, a lot of workers who were laid off in 2020 saw their incomes increase. For months, unemployed workers were getting a $ 600-a-week top-up, which combined with traditional unemployment, workers were making more unemployed than employed. So disposable income is the key indicator, not wages.

For a lot of workers, 2020-2021 were the best of times from a financial perspective. Expectations were low. If you didn’t want to work, just say you have Covid. People learned that working from home meant they could skip busy work and pointless meetings. Incomes were high and the government was dumping trillions of dollars into the economy. Spending was low - consumers couldn’t buy vacations and plane tickets and bottle service because most leisure activities were shut down.

I think this may have led to a bit of complacency. People got used to the new normal of higher pay for less work. Everyone got used to being flush with cash. Since then, things have changed dramatically. Hourly workers are back in the restaurants and warehouses and stores. Many (but not all) white-collar workers are back at their desks. Inflation really started to bite. The typical American, financially speaking, is worse off today than they were two years ago.

Thus, I submit my following take on the vibes versus economy debate:

1. Incomes have risen for the typical American since January 2019, but have fallen since January 2021. Whether this is because of wage increases or stimulus checks is irrelevant. When deciding who to vote for in November, most Americans are not going to look at how they were doing in 2019. They will look at the last 1-2 years. It is totally sensible for a worker to have a negative view of the economy if their real income is lower today than 18 months ago, regardless of what life was like four/eight/twenty years ago. That’s how people behave.

2. Overall consumer sentiment is based on relative change from the recent past. Inflation going from less than half a percent to over eight percent in over two years was always going to cause a massive hit to consumer sentiment. Even during the ricocheting prices of the 1970s and 1980s inflation never increased by an order of magnitude. Consumers were used to decades of low inflation, so going from low to high inflation in such a short time is responsible for a lot of the pessimism.

3. The last three years have seen a great deal of economic upheaval. Every economic indicator changed during Covid with speed that never been seen. Future economists will likely have to omit the Covid years from any mentions of “fastest increases” or “largest decreases” for the rest of time. So while it looks to me that some of the consumer sentiment is unexplainably low, we live in a time where the impossible occurred. The more I think about it, the more it makes sense that consumer vibes would go haywire if the economy did.

4. With regard to the 2024 election, any hand-wringing is premature. If the election would have been in November 2023, I’d say Biden was toast. But it wasn’t. There are still 11 months for the economy, and vibes, to shift. How people feel in 2023 isn’t going to have a big impact on how they vote in 2024. When people head to the polls in November 2024, they will compare their lives to how it was around the Summer of 2023. The story is still being written.