What will it take for Americans to stop worrying and finally learn to love the U.S. economy?
For context, that’s more than double the pace from the prior quarter, the fastest rate of growth since late 2021, and light-years higher than economists had been expecting not too long ago.
When this year began, a majority of private-sector economists surveyed were predicting an imminent downturn. Heck, even as recently as June, the staff economists at the Federal Reserve were predicting a “mild recession” that would begin sometime in 2023. These economists are not right-wing partisans trying to make President Biden look bad, or naive normies brainwashed by a pessimistic media, whatever Democrats’ fever dreams might be. They’re professional forecasters paid to get the numbers right.
Those doomer forecasts have since been scratched out in any case. Needless to say, 4.9 percent annualized growth is nowhere near standard recessionary territory, when the GDP is instead often shrinking.
Remarkably, the U.S. economy is not only exceeding those pessimistic forecasts from a few months ago — it’s also exceeding forecasts made even before the pandemic began, based on predictions published in January 2020 by both the Congressional Budget Office and the International Monetary Fund for where we’d be around now.
This is not true for other countries. In most of the world, economies are still doing worse today than pre-pandemic forecasts estimated. Which kinda makes sense, given the huge hole that an unforeseen global health crisis blew in every economy.
Gangbusters growth wasn’t the only good news in Thursday’s Commerce report.
For the first time since late 2020, the Federal Reserve’s preferred measure of inflation is back down to a number that starts with a 2 (specifically, 2.4 percent). Why is this significant? The Fed’s target inflation rate is 2 percent. We’re now within spitting distance of achieving it, hopefully without the recession that has historically accompanied a drawdown in high inflation.
This is one quarter’s worth of data — the numbers can be noisy, and they’ll be revised multiple times before Commerce settles on a final figure. So, as always, don’t read too much into one report alone, especially since some other risks loom on the horizon (wars, a possible government shutdown, tightening financial conditions, etc.). Few economists expect the coming year’s growth to be as red-hot as last quarter’s.
That said, other economic indicators lately look solid, too, including data on rising wages.
This all raises two questions. First, why are the numbers so much stronger than professional forecasters had expected? And second, why don’t Americans seem to believe them?
No one (including yours truly) knows the answer to either of these questions for sure. But the ambivalent consumer appears to be key to both.
Consumer spending has lately been defying gravity. Despite inflation, and despite rising interest rates that make all kinds of purchases more expensive, consumers continue to keep their wallets open. Maybe they got into the habit of spending more money; maybe they feel pressured to keep up with the Joneses; maybe they’re feeling more flush than they let on.
Whatever the case, they’re still spending — and they’re a central reason that economic growth has been unexpectedly resilient.
Meanwhile, consumers’ stated outlook on the economy is completely at odds with their spending behavior. In fact, according to the University of Michigan consumer sentiment index, Americans are about as negative about the U.S. economy today as they were during stretches of the Great Recession. As a reminder, the economy was in a very bad place then: The foreclosure crisis was still rippling through the economy, and unemployment was hovering around 9 percent, more than double what it’s been lately.
On nearly every metric, the economy looks better today than it did then — and yet consumers still hate this economy about as much. The one outlier measure, of course, is inflation. Even though it has slowed quite a bit lately, people are clearly still furious about the price growth they’ve already endured. Maybe this isn’t so surprising. Historical research from developed countries suggests that few things make the public angrier than an unexpected burst of inflation.
Plus, as poor as Biden’s polling (especially on the economy) has been, note that leaders in other countries that are enduring high inflation are mostly polling worse than he is.
There are also signs of strain among U.S. consumers, despite their continued spending. Credit card and auto loan delinquency rates are rising, for instance. So it’s not as if all is hunky-dory, or the threat of recession has completed disappeared.
However unhappy you might be with the economy now, though, it’s worth remembering one thing: It could be so much worse.
