By Howard Schneider
WASHINGTON (Reuters) – Whether it’s the “collective trauma” cited by the American Psychological Association (APA) or the bad “vibes” noted by internet analysts, there has been a clear break between the U.S. economy’s performance and public attitudes about it, according to new research from the Chicago Federal Reserve.
Researchers at the regional Fed bank studied measures of consumer and business sentiment and found a schism occurred in the spring of 2020 when the onset of the coronavirus pandemic posed mortal risk to the entire country and reordered the economy in ways that are still not fully understood.
Jacob S. Herbstman, a research assistant at the Chicago Fed, and Scott A. Brave, a senior economist at the bank, found the post-pandemic years have seen “a decline in the average level of optimism” for any given set of economic outcomes – a mood shortfall that could influence the country’s economy as well as its politics.
“Historically, a tight link existed between consumer and small business sentiment in the U.S. and economic conditions” with measures like the unemployment rate and income able to explain much of the variation in household and business surveys conducted by the University of Michigan, the National Federation of Independent Business, and the Conference Board, they wrote. “That link appears to have been severed after the pandemic recession,” an explanation for why a sub-4% unemployment rate and wage gains that are outpacing inflation have not registered more deeply with the public.
The researchers don’t pinpoint a reason for the shift, though their top culprits are the price level – not so much the rate of inflation but the fact that prices remain higher than they were – or the possibility that lower rates of unemployment have come to be expected as the norm.
The shock of the pandemic could itself play a role, and U.S. central bank officials have been closely attuned in the aftermath of the crisis to how expectations about the economy and particularly inflation have performed.
‘MAJOR STRESSOR’
Attitudes about the economy can influence economic behavior, something the Fed was particularly worried about last year when rising prices and broad talk of recession sparked concerns about the country talking itself into a downturn – a moment economics commentator Kyla Scanlon dubbed the “vibecession,” and which Robert Shiller, a Nobel Prize winner in economics, connected to his theories about the power of economic narratives.
The ill feelings may cut even deeper than that. In its Stress in America 2023 report last month, the APA said the country was “recovering from collective trauma” that may be rooted in the pandemic but has sources far beyond it, including economic ones.
“The COVID-19 pandemic, global conflicts, racism and racial injustice, inflation, and climate-related disasters are all weighing on the collective consciousness of Americans,” the group said.
Survey responses showed about two-thirds of respondents cited health, money and the economy as top day-to-day sources of stress. It also showed big jumps since 2019, before the pandemic, in the share of people citing the economy as a “major stressor.” About half of those aged 18 to 44, for example, saw the economy that way before the pandemic, versus more than 70% now.
With their prime earning years still to come, along with important decisions about education, family formation and home purchases, members of that age group are important to the macroeconomy, while the competition to motivate and earn the support of younger voters is seen as critical to the outcome of the presidential election next November.
That leaves less than a year for the economic mood to shift if, as the Fed expects, inflation continues to fall, but alongside weaker wage and job growth.
Recent reports on sentiment have shown an improvement, in fact. The outlook for inflation has gotten better, and the University of Michigan’s preliminary reading of consumer sentiment in December jumped by the most in about two and a half years.
“Consumer sentiment soared 13% in December, erasing all declines from the previous four months, primarily on the basis of improvements in the expected trajectory of inflation,” Joanne Hsu, the director of the University of Michigan’s Surveys of Consumers, said in a statement accompanying the data on Friday.
(Reporting by Howard Schneider; Editing by Paul Simao)
