Interest rates are falling globally, changing the political and economic landscape for 2024. Should rates continue their descent, especially at the quickening pace observed since October, the sour brew of American economic sentiment could meaningfully improve. Indeed, we got our first indication of such a pivot in Friday’s University of Michigan consumer survey, which reported that inflation expectations “plunged from 4.5% last month to 3.1% this month,” as overall positive sentiment soared from a reading of 61.3 to 69.4. Inflation has been coming down for months, and oil prices have been coming down too. But consumer sentiment readings have been poor for a while, reflecting that negativity can be sticky, and that good news may act with a lag. If inflation and interest rates keep moving in the same direction, it now appears sentiment is finally willing to follow.
The Vibecession is one of the more regrettable episodes in US economic analysis, because its thesis held that economic conditions were great, but Americans had been convinced by partisan politics and “the media environment” to think otherwise. If only the airwaves carried a more accurate and thus positive message, the US populace would more readily see they’d erred in assessing their own economic situation. Oof. Social science comes with a minimum set of responsibilities, and whether we are working within cultural anthropology or economics, concluding that “people are just plain crazy” is a no-no, a kind of giving up on the discipline. Thus, it was embarrassing to say the least to see some economists pound the table in a shouty recap of all the great data, asserting that it was “impossible” that Americans could be unhappy, while others capitulated and said, well, it must indeed be the damn radio waves, warping the national mind.
To clarify, there is a consistent layer of highly embittered, low-information voters who have been angry about the US economy for a long while. Given that several economic expansions over past decades left large swaths of the country unimproved, however, those angry views are quite justified. Two things can be true at once: a voter can be almost entirely ignorant of who is making policy, can be wrong about all sorts of national facts, can parrot nonsense and lies from AM talk radio, and yet, can still be right about their own difficult, overall economic condition. The riddle of the Viebcession, however, was not to solve for this group, but rather, the rest of America that remained steadfastly grumpy as the economy, wages, and inflation improved during 2023.
The Gregor Letter addressed the riddle this October: see We Are Unhappy. That essay offered up the most generic and orthodox of explanations, suggesting that we were still too near in time to the inflation experience, and that interest rates themselves had amplified the pain:
Two areas that are perhaps ripe for exploration, therefore, are the universe of prices that Americans don’t experience every day, and also, how the rise in long term interest rates have bled into everything—not just in credit card rates and mortgage rates, but in prices too…Americans experienced inflation in real time, starting roughly two years ago, in daily prices like food, simple services, and energy. But there’s a large category of prices that come into the field of vision on a much longer cycle…Interest rates are also potentially overlooked as a source of stress because, although national data shows a solid improvement in personal debt levels, the punishing rates on credit cards and mortgage rates will have also shown up for Americans more recently, starting slowly as 2022 began, and turning more severe coming into 2023.
Helpfully, we are now getting some academic work that attempts to show how emotionally sticky an inflation episode can become, leaving its imprint on human thinking even as it passes out of existence. Ryan Cummings and Heale Mahoney at Stanford assert that it takes time for consumers to digest the prior year’s inflation experience, and that the decay of this negative sentiment moves at a slow rate.
As the British like to say, well fancy that:
We estimate the impact of current and prior years’ inflation on consumer sentiment and find that the impact decays at a rate of about 50 percent per year. Despite much lower annual inflation, the cumulative negative effect of recent inflation on sentiment declined only 40 percent between June 2022 and today. If we experience 2.5 percent inflation over the next 12 months, we estimate the cumulative downward drag will drop by another 50 percent.
The Vibecession was ultimately useful in the way it unmasked the indulgent and self-serving inclinations of a range of groups. Journalists and especially political writers convinced themselves the media environment was so comprehensive in its influence that it had full-spectrum deterministic impact on Americans. No, it didn’t, and it doesn’t. Economists fired off FRED chart after FRED chart in exasperation that dumb and crazy Americans “just weren’t getting it.” The common error was of course an old one: abandoning materialism. Yes, humans do have a capacity to detach from reality but you can always count on material circumstances to exert their gravitational pull.
The US 10 Year Treasury yield has fallen from 5.00% to 4.25% in just seven weeks. The other global benchmark, the German 10 Year, has fallen from 3.00% to 2.25% in 9 weeks. In roughly the same period oil prices have fallen from $94 to $71 for West Texas Intermediate. And inflation readings keep falling also. These are all big moves to unfold in such a short period of time. To cap things off, we got a blockbuster productivity report which is kind of the holy grail if you’re a central banker, because higher output coming from the same number of hours worked portends a whole grab bag of good things to come.
American sentiment is starting to change about the economy, but without any comparable change in the media environment is. Imagine that! As real wages improve further while inflation and rates fall, the majority of Americans will continue to process the change as they integrate new information with their remembered experience.
Further reading: “Digesting Inflation,” the essay cited above from Cummings and Mahoney at their Briefing Book newsletter, is worth reading in full. Especially because they too identify a thick, hyper-partisan layer of the public, around 30%, that consistently sees the economy through the lens of the current President’s party affiliation. This highlights the other mistake made by Vibcession advocates: fallacy of composition, applying the partisan layer to the whole.
Further listening: if you are prospecting for falling inflation and rising productivity as we head into 2024, this WAMU podcast covering AI features wonderful nuggets of reader email, as people tell stories of how ChatGPT has changed their work lives.
Well known American investor and market strategist and commentator Byron Wien died last month at age 90. Known for his year-end Ten Surprises—in which he examined events that investors gave only a 33% chance of occurring when he deemed the odds were a bit better than 50%—Byron definitely added a twist to the raft of new year predictions that have become so common. In that spirit, here are Ten Surprises for 2024:
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