Friday, February 11, 2022

What Makes Americans Happy?

 The Mortgage Corner

Why do economists and pundits like to focus so much on consumer confidence, which fluctuates wildly, as the U Michigan sentiment survey graph shows? It rose as high as 112 in February 2000 during the heady Clinton years, when the cold war with Russia seemed to be over, and has fallen to 61.7 in its February take while the Omicron variant is still rampant.

UnivMichigan

The gray bars portray recessions, and so it shows how consumers see themselves before and after recessions. Right now, it’s the double-whammy of Omicron and high inflation they say worries them most.

“Sentiment continued its downward descent, reaching its worst level in a decade,” said its chief economist, Richard Curtin, “falling a stunning 8.2% from last month and 19.7% from last February. The recent declines have been driven by weakening personal financial prospects, largely due to rising inflation, less confidence in the government's economic policies, and the least favorable long term economic outlook in a decade.”

So how does that square with actual economic conditions? Not very well. The US economy expanded at its fastest pace in 40 years last year—6.9 percent in December and 5.7 percent for all of 2021—with consumers spending like there was no tomorrow.

And more than 6.7 million jobs were created in 2021 with 1.62 million jobs added in just the past three months.

FREDcpi

The inflation rate itself has fluctuated as much, especially the Consumer Price Index for retail prices (per FRED graph), which the Federal Reserve pays less attention to because of its volatility.

So why such pessimism about their economic conditions, when the Fed and most economists maintain the current inflation rate is mostly due to the ongoing pandemic and should begin to subside by mid-summer?

The University of Michigan survey team attempted to explain the divergence from reality last year in a terrific report entitled, The Partisan Economiy. It’s largely because of events that have overwhelmed our broken political system.

“Two developments have been responsible for the rise of the partisan economy: growing income inequality and the repeated crises whose solutions demanded extraordinary governmental intervention (9/11 for Bush, the Great Recession for Obama, and the covid pandemic for Trump and Biden).

“Unfortunately, the size of the partisan divide in expectations has completely dominated rational assessments of ongoing economic trends,” the report continues, “This situation is likely to encourage poor decisions by consumers and policy makers alike. While there have always been differences in preferred policies, the overwhelming size and persistence of the partisan gap has generated substantial economic uncertainty.”

It is convenient to blame covid, but I prefer to blame something just as real; the abysmal level of current political discourse among our political leaders that resulted in the January 6 attempted insurrection.

Until our leaders find a common language that both political parties understand, consumers will continue to lack confidence in government and a more favorable economic outlook.

Harlan Green © 2022

Follow Harlan Green on Twitter: https://twitter.com/HarlanGreen

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