Why so glum?
The economy is booming, with unemployment near a 50-year low. Yes, there is high inflation, but NGDP is up 10.6% over the past 4 quarters, easily outpacing the rate of inflation. Nonetheless, the public feels horrible:
US consumer sentiment plunged in early June to the lowest on record [since 1978] as soaring inflation continued to batter household finances.
The University of Michigan’s preliminary June sentiment index fell to 50.2, from 58.4 in May, data released Friday showed. The figure was weaker than all estimates in a Bloomberg survey of economists which had a median forecast of 58.1.
That is rather surprising, given that the economy presents a mixed picture with both good news and bad. Why so glum?
In April of last year, I predicted that the public’s mood would turn sour. When discussing the massive fiscal stimulus, I made this observation:
There’s always a price to pay for unsustainable good times, and thus I expect the public’s mood to turn sour in the fall and winter, even as employment recovers—indeed because employment recovers. Someone has to do all those crappy jobs.
My point was that people would be working much harder, but not earning much more money. At the time, some workers earned more on unemployment than they had earned on their previous jobs.
Is there any data to support my claim? I mentioned above that NGDP was up 10.6%. In most cases, that figure is highly correlated with changes in personal income. But not this time. Personal income is up only 2.6% in the twelve months to April 2022, far below the rate of inflation. This reflects the withdrawal of fiscal stimulus. No wonder the public is so grouchy. (The unexpectedly high inflation made things even worse than I expected last April.)
To be clear, I don’t think this fully explains the public’s extremely bad mood. Consumer sentiment was far higher (71.8) back in April 2020, when the unemployment rate was 14.6%. The public has clearly become grouchier due to factors beyond just the economic situation. But it’s a big part of the story.
PS. Interestingly, consumer sentiment in June 2008 (56.4) and February 2009 (56.3) were virtually identical (at a very low level). But look how different the two economic situations were!
June 2008: Unemployment = 5.6%, 12-month inflation = 4.9%
February 2009: Unemployment = 8.3%, 12-month inflation = 0.01%
What did Tolstoy say about unhappy families?