- Recent economic data has been encouraging, but Americans still feel bad about the recovery.
- The “vibration” comes from weakening worker power, high inflation and falling real wages.
- If it persists, the bad mood could slow spending and send the economy into a real slump.
The economic recovery from the coronavirus recession has been among the fastest in modern history.
It’s also one of the weirdest. Americans are depressed by the state of the economy, citing soaring prices and slowing economic growth. Yet the indicators used to track economic health for decades are flashing signs of undeniable strength. In July, the United States reached a record level of employment, inflation began to subside and wages continued to climb at a faster rate than usual.
The zeitgeist already has a name that matches its bizarre nature: a “vibecession”. Kyla Scanlon, a markets and economics blogger, coined the term in a June 30 Substack post, highlighting how rising prices are creating bad vibes that overshadow generally strong economic data. A healthy jobs report doesn’t mean much to a worker if their wallet is getting lighter day by day.
This is not how economic recoveries usually unfold. Rebounds from the recessions of 2001 and 2008 saw the labor market slowly recover while inflation hovered around 2%. The opposite is happening today. Employment has healed at the fastest pace in decades, but inflation is near four-decade highs. The country is also grappling with an unusually persistent labor shortage as childcare pressures and virus concerns keep workers on the sidelines. Simply put, the United States is in uncharted economic waters.
There is also immense uncertainty about when and how quickly inflation will improve, and whether this cooling necessitates a recession and widespread job loss. The way forward is murky for most experienced economists, let alone the average American, and that adds to the bad vibes, Scanlon said.
“The only certainty is uncertainty, the only conviction is its absence, and the only way forward is blindfolded,” Scanlon wrote.
The United States is not in a recession, according to the National Bureau of Economic Research, the group of economists that decides when downturns begin and end. But bad vibes from Americans indicate serious problems are emerging in the recovery.
The “wedge” protecting Americans from inflation is collapsing
Americans are feeling bad about the economy, but their finances are still holding up relatively well. Real personal disposable income — the money Americans can spend after inflation and taxes — is still hovering around levels seen just before the pandemic hit. Despite soaring prices and falling real wages, the average household still has about the same financial strength as it did at the start of 2020.
It’s unlikely to last, though. The gauge has been on a downward trend since last summer, dragged down by accelerating inflation and dwindling stimulus. The cushion that protected Americans from soaring prices is now stretched thin.
Positive disposable income has created a “historically quite rare” gap between inflation and spending that has kept the recovery going, said Arend Kapteyn, global head of economics and strategy research at UBS Investment Bank, during an interview. a call on July 20 with reporters. But this gap will not last forever.
“It probably starts to dissipate over the next few quarters and then the two will converge,” Kapteyn said, adding that “it’s a bit of a race against time” to get inflation down before household finances do not deteriorate further.
Jobs are everywhere, but worker power is fading
The Biden administration, the Federal Reserve and countless economists have pointed to the rapid labor market recovery as a sign that the economy is far from in recession. However, a closer look at the backdrop of hiring reveals many other reasons why Americans are feeling down.
For one, job seekers aren’t enjoying the same demand as in 2021. Companies that previously had no problem attracting candidates have started offering signing bonuses, free food, and even free iPhones to recruit new recruits.
These benefits are gone now. Slowing economic growth and rising interest rates have dampened many companies’ hiring plans, wiping out the benefits of a labor-intensive economy.
Those who worked during the pandemic are losers in their own way. While inflation slowed through July, wage growth is still far from keeping pace with rising prices. Real average hourly earnings hit $32.27 last month, down from the February 2020 high of $32.56.
“Consumers feel really good about the labor market, to the extent that they can find jobs, but they don’t feel good about inflation that is outpacing their income growth,” said Brett Ryan, economist senior American at Deutsche Bank, to Insider. “It’s like, ‘I have a job, but I’m just sprinting to stay in place.'”
The labor shortage that has driven up wages is also fading. Job vacancies fell to 10.7 million from 11.3 million in June, marking the biggest one-month drop since the start of the recovery. Workers are also quitting at a slower rate, suggesting that the hiring environment is not as attractive as it has been in recent months.
“A slowdown in the labor market is likely to lead to higher unemployment, and that’s precipitated by rising interest rates,” Ryan said. “I think it’s absolutely true that this mood is likely to linger for some time.”
Bad vibes in the US endanger a still fragile economy
There wouldn’t be much to worry about if Americans’ bad vibes were just feelings. But a lingering sense of weakness can hold back the recovery.
The thesis is this: consumer spending accounts for about 70% of overall activity – the main fuel for the economy as it recovers from the pandemic recession. Spending has remained strong through 2022, but as real disposable income continues to fall, Americans will feel more pressure to cut back on purchases to preserve their savings.
If inflation slows quickly and wages continue to rise at a healthy pace, disposable income can rebound and spending can hold steady, UBS’s Kapteyn said. If inflation remains high, spending could turn into negative disposable income. Americans would cut spending sharply and the United States could plunge into a consumer-driven recession, the economist said.
Weakness in the labor market — and its effects on Americans’ moods — could also trigger a downturn, according to Ryan. It “usually takes a shock” to slow household spending, and “further deterioration in the labor market” may be enough to worsen Americans’ moods and “turn sentiment into reality”, he said.
The July Inflation Report signals that the United States is on the right track, but if price growth does not slow quickly, bad vibes from Americans could soon become a major threat to the still incomplete recovery.