opinion | The vibes in the economy are… weird. really weird.

The economy is the story of what people do – how we spend money and time, the quantitative and qualitative aspects of our existence. When that story becomes too noisy to explain, people expect the worst. Conflicting narratives about the state of the economy are colored by conflicting interpretations of those narratives, and it becomes nearly impossible to understand what is actually happening in the economy. What people expect may soon be over, and right now, with deteriorating data, many people’s hopes have come together to anticipate a recession. And those expectations could very well lead to one.

Gross Domestic Product shrink away In the second quarter of 2022, the slowdown from the previous quarter continues. These GDP figures were icing on the cake of bad news – a 9.1 percent rise in the consumer price index, a spurt in home prices and a soft labor market, as evidenced by the increase. Unemployment allowance,

Economic indicators are a Jackson Pollock painting of data points and trends. If you think about them all closely enough, they start to make some sense, but there’s a lot more to explain. Economists have basic theories about what the economy should do, but a pandemic, a war and a supply chain crisis have widened the gap between the “reality” of economic data and people’s experiences of that reality. If we’re not careful, erroneous assumptions – what John Maynard Keynes called “animal spiritsor what the economist Fisher Black calls “Noise“- will fill that gap and meet our worst expectations.

Consumer spending accounts for about 70 percent of GDP, which is largely driven by consumer sentiment. How you, me and everyone else feel about the state of the economy determines what and how much we buy. Recent consumer confidence metrics have been weak, Conference Board’s Consumer Confidence Index Falling to the lowest level since February 2021. According to the Bureau of Labor Statistics’ statistics Since last week, inflation-adjusted wages have fallen 3.1 percent over the past year, and as prices rise, purchasing power continues to decline. It is nearly impossible to break into the housing market, as Home prices have risen 40 percent in the last two years. Broadly speaking, consumers are not feeling good about their ability to buy anything right now.

Many blame inflation on corporate price increases, and There is definitely a kernel of truth From that. However, the earnings expectations of many corporations are plummeting Because they also struggle with high production costs. many retailers are entering an environment where their inflation becomes deflationary as the excess inventory they ordered to fight supply chain uncertainty is now marked up in an attempt to sell it.

A budget constraint for both consumers and corporations is the lack of necessities such as natural gas and oil. When energy prices rise, the price of everything goes up, and this can result in a double effect on costs for consumers.

The Federal Reserve, the Ultimate Vibe Setter in Both Good Times and Bad, Is Getting Full “Fast and Furious” mode To try to fight inflation. The Fed’s main tool now is to spoil the overall vibes – managing demand by raising rates and making it more expensive for people to buy things.

People’s perceptions shape the economy, but those perceptions are shaped by the Fed. The risks of moving too fast are especially high now, as a fall in GDP and other economic indicators suggest the economy is already slowing. If the Fed raises rates too much in this environment, it risks a recession.

The Fed is doing everything it can to achieve that.”soft-ish landing”, which comes with risk. As we all know, the Fed can’t plant corn. It cannot steer boats fast. Essentially, Federal Reserve Chairman Jerome Powell’s tool kit is lowering his specs in an attempt to normalize the forces of supply and demand and vigorously saying, “Hey, stop buying so much stuff”.

The problem is that there is no need to further reduce demand; This is already happening. Instead, we need supply-side changes – more workers, more goods and more services – that require more than just monetary policy.

The tremors in the economy… are strange. That strangeness has a real effect. recently study found that broader vibes actually drive what people do, with media narratives about the economy accounting for a 42 percent drop in consumer sentiment in the second half of 2021.

Indicators like GDP are important, but most of the time, the root of economic problems lies with expectations. When we think about things like inflation, financial conditions, and monetary policy, it’s best to formulate them through people. And people, of course, are silly and messy. Many economists and experts forget that the economy is actually a group of “people” who are trying to understand this world.

When policy focuses more on indicators that may not fully reflect reality, and not on the stupid and messy people whose policy is meant to serve, we enter dangerous territory.

No recession yet. Now we are one”vibe-op“A sort of — a period of diminishing expectations that people are feeling based on both real-world concerns and past experiences. Things are off. And if they don’t improve, we have more to worry about than bad vibes.”

Kyla Scanlon (@kylascan) founded the financial education company Bread and produces newspapers and videos about the economy. Before starting his own company, he worked at Capital Group and an education start-up.

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