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Last year, the economic vibes were so bad it felt like we were talking the US into a recession. Now, people are wondering whether the “vibecession” is truly over.
And maybe it is? The mood is certainly improving. US consumer sentiment is on the up again, with many people seemingly celebrating (slightly) lower gas prices. The Federal Reserve seems convinced as well, with Jay Powell stating at the FOMC presser on July 26th that:
The [Fed] staff now has a noticeable slowdown in growth starting later this year in the forecast, but given the resilience of the economy recently, they are no longer forecasting a recession.
I would say that having headline inflation move down that much . . . will strengthen the broad sense that the public has that inflation is coming down, which will in turn, we hope, help inflation continue to move down.
Of course, Powell’s announcement triggered a series of jeers on Twitter from people proclaiming that we’ve been in a recession since before time began. But things really are looking okay! Growth is resilient. Inflation is cooling. The labour market is humming along. While real wages are down in most of Europe since 2019, in the US they’re up 6 per cent.
In fact, as UMass Amherst’s Arin Dube has pointed out, real wages for most American workers are not only higher than they were prior to the pandemic, but almost to where they would be if the global pandemic that shuttered swaths of the economy and put millions out of work had never even happened. Which is a pretty big win. I mean, people spent enough on Taylor Swift’s tour that it even warranted a mention in the Philadelphia Fed’s Beige Book.
Despite the slowing recovery in tourism in the region overall, one contact highlighted that May was the strongest month for hotel revenue in Philadelphia since the onset of the pandemic, in large part due to an influx of guests for the Taylor Swift concerts in the city.
Basically, people are feeling a bit better. The vibes continue to improve. The proportion of US companies that mentioned the word “recession” on earnings calls has nosedived from a high of 27 per cent earlier this year to just 11 per cent in the latest quarter.
As Goldman Sachs said in its own Beige Book rountup of business sentiment (with Alphaville’s emphasis below):
. . . Company commentary this quarter reflects the belief that a soft landing is possible. While many management teams were pessimistic on the economy in late 2022 and following banking stress in March, sentiment has improved. Several companies acknowledged the resilience in the U.S. economy had led them to now expect a soft-landing. But other companies still anticipate a near-term recession, albeit later than previously expected, and some companies continue to incorporate a slowdown in economic growth into their planning and guidance.
Even investors are becoming increasingly confident that the economic landing will be a soft one. Just take a look at Bank of America’s latest fund manager survey for August.
As BofA highlighted, the consensus is still that the economy will hit a mild downturn, but fears of a “hard landing” keep receding, and a rising proportion think there might not be any landing at all.
But the vibes are not perfect.
Student loan payments are starting back up, which could feel like a 5 per cent pay cut in the US. Inequality is rising through drops in Medicaid enrolment, and homelessness is on the rise again. The resilient economy might mean the Fed tightens further, which isn’t great for vibes or the real economy. Workers are going on strike, which is important! Go workers! But it definitely puts pressure on growth (and as Noam Scheiber points out, it underscores “the fracturing of work into lower-paying, degraded pieces”.)
Diane Swonk of KPMG highlighted some more pressure points:
Brace for a sharper slowdown in spending over the summer and fall, as tighter credit condition collide with the crimp from the end of student loan forbearance and tighter credit conditions.
Rejection rates for vehicle loans hit a record high in recent months and have begun…
— Diane Swonk (@DianeSwonk) July 18, 2023
So there are still a lot of things to fix.
Even vibe-wise, we have a lot of work to do. It’s hard to ignore now much sentiment and actual data can diverge these days. Sentiment is only picking up from semi-depressed state.
Wharton’s Ethan Mollick recently shared an old paper on the ‘blurry vision bias’, and how leaders talk in big grand sweeping ways that don’t really help align people to their mission. That’s the problem with a lot of currently-hyped things these days — it has no end state. What’s the vision? What’s the goal?
Mollick highlighted another relevant paper on this, which took its title from an apocryphal story where president John F. Kennedy met a Nasa janitor late at night. When JFK asked him why he was working so late, the janitor replied: “Because I’m not mopping the floors, I’m putting a man on the moon!”
We seem to be missing that big national goal these days. Or at least more common, compelling narratives. I circle this point a lot (and recognise that it’s abstract!) but I think that in order to encourage a true vibe change (a shift of the vibe supply if you will) we need to find ways to tell better stories, especially on a fiscal level — for example, how is reshoring helping people, why is Bidenomics a banger, etc etc.
But overall, the vibecession seems to be cleared, and hopefully, a recession too. Let’s hope it stays that way!