It's The Economy, Stupid

A strategist in Bill Clinton's successful 1992 presidential campaign against incumbent George H. W. Bush; the title of this post was coined by James Carville as a missive to campaign workers. 

By traditional measures our economy is strong.  Unemployment is near a fifty year low.  Inflation-adjusted wages are higher today than before the pandemic, job satisfaction is up and inflation has slowed significantly.  For the period July thru September the economy expanded at an annual rate of 4.9% 5.2% (revised) - the largest rise since the last three months of 2021.  

The record low unemployment has translated into consumers spending more on travel and entertainment this past summer.  Accounting for two-thirds of all economic activity, it is consumer spending that fuels the US economy. 

Inflation has moderated considerably to 3.7 percent from last summer's peak of 9.1 percent.  Benefiting from the strength of stock, bond and real estate markets, household net worth is up too. 

But don't take my word for it, you can read the report card yourself here. 

Nevertheless, Americans don't necessarily see things through rose-colored lenses.  Polling of swing state residents reveals that eight in ten voters said the economy was fair to poor.  Only two percent suggested the economy was excellent.  The vast majority of all Americans, across race, age, gender, education, income, politics, geography, held a negative view of the economy.

Making this apparent disconnect even more confounding, consumer behavior is nowhere near what we might expect to witness if the economy was performing poorly.  Actual consumer behavior is typical of what would be seen when the economy is performing like it has been.

Consumer optimism is down, yet Americans are spending more.

What gives?  As a recovering financial guy this is causing me no small amount of cognitive dissonance.

Domestic oil production and refining is at an all time high and gasoline is relatively cheap.  So is it higher prices for groceries, diesel and dining out?  That certainly doesn't explain why folks haven't cut back on their spending.  Why are all of these people spending  and buying?  Consumer behavior is out of whack with consumer sentiment. 

A generally reliable economic insight is revealed preference theory.  The assertion is that the most certain way to measure consumer preferences is to measure their purchasing behavior.  Theoretically, the assumption is that in the end, consumers are rational.  Any devotee of behavioral finance is likely having a field day with this stuff. 

Sure, economics can be exceedingly complex and difficult for a layperson to understand.  Moreover, I think the media in general does a poor job of explaining phenomena such as price gouging, the correlation between global oil supply and the price at the pump or how massive stimulus spending commencing with Trump and continuing under Biden fuels inflation.

Policy most certainly plays a role in economics; but market forces exert a greater influence than any single governor, president or prime minister.  Inflation is global in scale; is old uncle Joe singularly responsible?  A more likely explanation is combined stimulus spending by multiple economies in response to the COVID emergency generated sufficient excess liquidity to spike inflation.  

It should come as no great surprise that our country's Chief Executive routinely takes the credit for a strong economy and is blamed when things turn south.  What I'm witnessing is a perception versus reality dichotomy.

Polling reveals that of registered voters, 59 percent have more confidence in Donald Trump's handling of the economy compared to 37 percent expressing confidence in Joe Biden.

If Trump wins the election in 2024 will my cost of unleaded gasoline fall from $2.84 to $1.84 the day following his inauguration?  Or is that a perception?

I grapple with this incongruous economic perception versus reality.  Spending behavior doesn't square with a vast swath of the population struggling to get by.  That doesn't mean some folks are struggling.  I can appreciate someone's life difficulties.  If you are 21 years old and fresh out of college or just trying to make it on your own life can be a struggle.  It was for me.  Unless you come from money the first decade of independent adult life is a contest to find your way and build economic stability.  When I went into business I was poor enough to qualify for surplus government cheese.  True story.

Nevertheless, persistence, hard work, long hours, no small amount of risk-taking eventually led to a reasonable lifestyle and comfortable retirement.  Emphasis on reasonable and comfortable.  Not extravagant and ostentatious. 

I'm also going to go out on a limb and play my old guy who's seen a lot of things in his life card.  The last several decades have been witness to the dot com crash, 9/11, the housing crash and Great Recession and COVID.  These are the practical memory for many people younger than me.  They're ingrained in my life experience too.  I've also had the life experience of witnessing an oil embargo, gasoline rationing, the draft during an unpopular war, raging double digit inflation, followed by double digit interest rates.  My first home was a duplex financed at the bargain fixed rate of 14.5%.  True story.

I have lived the reality of economic restructuring, downsizing, offshoring, the dismantling of family-supporting manufacturing jobs and recessions.  I was laid-off from my first real job out of college as a consequence of being low man on the totem pole.  Lack of seniority.  All generations struggle yet it seems that on balance each generation advances economically over the previous.  Not always - but generally-speaking.  

What is interesting to me are the confounding perceptions versus reality in an environment where the economy is about as good as it gets.  Strong economic growth, very low unemployment, rising real wages, rising median net worth and moderating levels of inflation.  How are these people gonna feel when we inevitably tip into a recession?

More about perceptions and bad information tomorrow.

Stay-tuned.....