Authored by Mike Shedlock via MishTalk.com,
This is easy to explain with charts and ideas...
An Imagined Paradox
The Brookings Institute measured the macro conditions and wonders why sentiment is so poor.
Please consider The Paradox Between the Macroeconomy and Household Sentiment
Despite recent concerns over a slowdown, the U.S. economy is performing well according to most objective metrics. The top-line unemployment rate was 4.1% as of September 2024, well below its 21st-century average of 5.7%. GDP growth has been substantial, with real (inflation-adjusted) GDP growth of 3.0% over the past four quarters. Wages have outpaced inflation by 0.9% and the stock market has risen by 23% over a similar period. Investment, a key driver of the business cycle, fell very little as a share of GDP following the pandemic, outperforming the recoveries from every recession since 1980.
Judged over a longer time horizon, U.S. economic performance is similarly impressive, especially given the wrenching shock from the COVID-19 shutdowns of 2020 and 2021. Between Q1 2020 and Q2 2024, gains in housing equity and the stock market led to a remarkable $50 trillion expansion in household wealth—$28 trillion in inflation-adjusted terms. Despite the 2021–2023 inflation surge, wages have outpaced price increases since Q4 2019, with real median weekly earnings up 0.3%—with the highest gains for lower-wage workers. Indeed, despite COVID-19, real U.S. GDP is now $130 billion higher than the Congressional Budget Office (CBO) projected it would be in its pre-COVID-19 forecast.
Actual sentiment versus predicted sentiment
Before the pandemic, variation in sentiment could be largely explained using standard macroeconomic variables. In particular, a model that predicted sentiment using the unemployment rate, the inflation rate, aggregate consumption, and the performance of the stock market can explain 77.4% of the variation in sentiment over 2005–2019 (see Figure 2). However, over the last few years, this relationship has broken down, with a wide gap emerging between observed sentiment and predicted sentiment based on the state of the economy.
In simple terms, the puzzle we are examining is as follows: At most points in time over the past four decades, if consumers lived under an identical macroeconomy as they have now, their feelings about the economy would have been largely positive. But now this is no longer true; consumer attitudes about the economy are instead near all-time lows.
In sum, several trends suggest that consumer sentiment is not wholly driven by rational and accurate perceptions.
Real spending on international travel and the volume of travelers going through Transportation Security Administration (TSA) checkpoints have rebounded back to their pre-pandemic levels. Real spending on air transportation has skyrocketed more than 40% above its pre-pandemic level.
CEO confidence itself remains above its pre-pandemic level. By this metric, businesses have been optimistic about the growth of the U.S. economy.
Possible explanations
If economic conditions are strong, and people are behaving in a way that reveals some optimism about the economic environment, why is sentiment so weak? Analysts have advanced an array of possible explanations. One possible explanation, offered by Greg Ip of the Wall Street Journal, is that peoples’ views about the general state of the world and country spill over into their views about the economy. Ip refers to this as “referred pain,” and notes that events like “intensifying political and cultural conflict and intolerance, the pandemic, the border, mass shootings, crime, war in Ukraine, and now the war in the Middle East” may be negatively affecting views of the economy, even if national aggregates tell a brighter story.
Such an explanation is certainly possible, although difficult to test since the non-economic factors that may be causing referred pain are difficult to identify. Moreover, several of the factors identified by Ip are actually improving over the period of interest. For example, in the first half of 2024 most violent crimes occurred at or below pre-pandemic levels, with less frequency than in the preceding 4 years, and the U.S. withdrawal from Afghanistan in 2021 means our nation is not at war for the first time in two decades.
Another plausible explanation, advanced by economist Jason Furman at a Brookings Institution event in January 2024, is that the pace of cumulative wage gains in the post-pandemic era is markedly slower than the years immediately preceding the pandemic (i.e., 2014–2019). Indeed, relatively slower real wage gains could plausibly be a factor behind the sentiment puzzle. However, several caveats are warranted. One, discrepancies in cumulative real wage gains are highly sensitive to the measure of wages, the inflation deflator, and the periods of comparisons. Three, if cumulative real wages drove sentiment, it is not clear why older households—with sharply lower rates of employment—would have reported a concomitant drop in sentiment.
Another proposed explanation for the disconnect between sentiment and fundamentals is that people are receiving more negative news about the economy despite the underlying fundamentals.
Ivory Tower Thinking
Wow what an amazing consortium of ivory tower thinking.
For starters, crime is high. Please note The Committee on Oversight and Accountability is investigating the Federal Bureau of Investigation’s failure to compile and report accurate, complete national crime data.
In 2023, the FBI initially reported an estimated 1.7 percent decrease in violent crime in 2022 but later quietly revised the report to show a 4.5 percent increase––a staggering 6.2 percent change.
The Biden-Harris Administration championed the purported decrease, but there was no decrease. The FBI failed to include in its initial count “an additional 1,699 murders, 7,780 rapes, 33,459 robberies, and 37,091 aggravated assaults,” resulting in not a decrease but an increase in violent crime of 4.5 percent in 2022. The FBI quietly revised the report to reflect this increase in violent crime but did not publicize it.
And CEO confidence is up. What a hoot. It’s shocking, shocking I say, that people are not thrilled about the number of billionaires the US has created to balance out those worried about being evicted.
Brookings also blamed politics. On this theory, Republicans are upset at Biden more than they should be, despite the fact that Biden is heavily despised by those not living in an ivory tower.
Let’s leave the ivory tower for a moment and live in the real world.
A Breakdown, by Sector, of the Negative 818,000 BLS Job Revisions
On August 22, 2024 I gave A Breakdown, by Sector, of the Negative 818,000 BLS Job Revisions
Those negative revisions are a direct result of the BLS Birth-Death model gone haywire.
Job Openings Drying Up
Job openings and quits are for September and not impacted by Hurricanes
November 1, 2024: Nonfarm Payrolls Rise a Mere 12,000 with Government Jobs Up 40,000
Job openings and quits, not impacted by hurricanes, put an additional spotlight on the poor October jobs report.
Nonfarm Payrolls Rise a Mere 12,000
Blame hurricanes if you like, but the impact is debatable. Only Hurricane Milton was in the reference period.
Data from the BLS, chart by Mish
November 1, 2024: Nonfarm Payrolls Rise a Mere 12,000 with Government Jobs Up 40,000
Job Stats vs One Year Ago
-
Nonfarm Payrolls: +2,173,000
-
Employment: +216,000
-
Full Time Employment: -1,000,600
Employment is up 216,000 in the past year? But how?
Change in Employment Excluding Government
Please consider Excluding Government, Year-Over-Year Employment Is Negative 9 Straight Months
I created the above chart by subtracting the year-over-year change in government employment from the year-over-year change in employment.
Non-Ag Employment Excluding Government
Non-agricultural employment excluding government peaked in August of 2023 at 138.026 million and is now 137.240 million, down 786,000 since the peak.
Unemployment Rate
The unemployment rate hit a 50-year low in January and April of 2023 at 3.4 percent. It’s now 4.1 percent.
“The unemployment rate has bottomed this cycle and will generally head higher.”
I first made that comment many months ago. If there was any doubt, it’s now erased.
The Housing Boom Economists Expected in 2024, Was a Bust
On October 26, I commented The Housing Boom Economists Expected in 2024, Was a Bust
The widespread theory (not in this corner) was the Fed would cut rates, mortgage rates would tumble, and that would stimulate existing home sales. What Happened?
Record High Home Prices
On September 28, I reported Yet Another Record High for Case-Shiller Home Prices
The pre-pandemic Case-Shiller national index was 370.9. Now it’s 553.1.
Home prices are up 49 percent in less than five years. And thanks to Fed QE wizardry, people could have and did refinance their mortgage at 3.0 percent or even less.
Phoenix Leads the Nation in Evictions
It’s not just Phoenix, or Arizona. Evictions are soaring in Texas and Nevada as well.
On October 30, I noted Phoenix Leads the Nation in Evictions, It’s a Yes-No Question
The question is: Did you pay the rent? It doesn’t matter why.
The Fed has destroyed housing with its boom-bust interest rate and QE manipulations.
A $150,000 House in 1988 Now Costs $707,500
August 10, 2024: A $150,000 House in 1988 Now Costs $707,500 Thank You Fed
The above chart represents the mortgage payment of the same $150,000 house reflecting the changing price and interest rate over time.
Case-Shiller Home Prices
September 28, 2024: Yet Another Record High for Case-Shiller Home Prices
Mortgage Rates Hit 7.0 Percent Again
October 28, 2024: Mortgage Rates Hit 7.0 Percent Again, Where to from Here?
With record home prices and mortgage rates back above seven percent, who can afford to buy a home?
Fed Beige Book Shows Only 3 of 12 Regions Growing, 3 Declining
October 23, 2024: Fed Beige Book Shows Only 3 of 12 Regions Growing, 3 Declining
The Fed Beige book shows a mostly steady economy in 6 of 12 regional reports. “Steady” is in context of the the worst Beige Book in years.
The Immigrant Crime Spree is Real
October 21, 2024: The Immigrant Crime Spree is Real, Not Imaginary, Thank Harris and Biden
Four years of open borders and sanctuary policies have brought criminal drug networks, human trafficking, and an epidemic of sexual assault.
Living Paycheck to Paycheck
Bank of America has an interesting report on who’s living paycheck to paycheck (PTP). It’s not just the poor. Blame the Fed.
Please note 20 Percent of Households Making Over $150,000 Live Paycheck to Paycheck
And that’s by a strict definition that only includes rent, food, insurance and other necessities. Over 40 percent live paycheck to paycheck.
Dear Brookings, Here’s Your Paradox
-
Negative 818,000 job revisions
-
Job openings crash
-
Full Time Employment: -1,000,600 from a year ago
-
Total employment: only +216,000 from a year ago
-
Excluding government, year-over-year employment is negative for the last 9 consecutive months
-
Non-agricultural employment excluding government peaked in August of 2023 at 138.026 million and is now 137.240 million, down 786,000 since the peak.
-
The unemployment rate is up 0.7 percent from the low at a pace that strongly suggests recession.
-
Home prices are up 49 percent in less than five years to new record highs.
-
A $150,000 house in 1988 now costs $707,500.
-
The mortgage rate is back above 7 percent.
-
The share of first-time buyers of existing homes is at a record low.
-
The Fed’s Beige Book looks very recessionary
-
The immigrant crime spree is real. The FBI lied about the crime rate dropping.
-
Evictions are at record highs in many states and might be everywhere were it not for eviction moratoriums.
And the Brookings Institute cannot figure out why sentiment is in the gutter.
Then again, the stock market is at an all time high. And CEOs are traveling more. That’s quite the paradox.
It must be Trump.
Authored by Mike Shedlock via MishTalk.com,
This is easy to explain with charts and ideas…
An Imagined Paradox
The Brookings Institute measured the macro conditions and wonders why sentiment is so poor.
Please consider The Paradox Between the Macroeconomy and Household Sentiment
Despite recent concerns over a slowdown, the U.S. economy is performing well according to most objective metrics. The top-line unemployment rate was 4.1% as of September 2024, well below its 21st-century average of 5.7%. GDP growth has been substantial, with real (inflation-adjusted) GDP growth of 3.0% over the past four quarters. Wages have outpaced inflation by 0.9% and the stock market has risen by 23% over a similar period. Investment, a key driver of the business cycle, fell very little as a share of GDP following the pandemic, outperforming the recoveries from every recession since 1980.
Judged over a longer time horizon, U.S. economic performance is similarly impressive, especially given the wrenching shock from the COVID-19 shutdowns of 2020 and 2021. Between Q1 2020 and Q2 2024, gains in housing equity and the stock market led to a remarkable $50 trillion expansion in household wealth—$28 trillion in inflation-adjusted terms. Despite the 2021–2023 inflation surge, wages have outpaced price increases since Q4 2019, with real median weekly earnings up 0.3%—with the highest gains for lower-wage workers. Indeed, despite COVID-19, real U.S. GDP is now $130 billion higher than the Congressional Budget Office (CBO) projected it would be in its pre-COVID-19 forecast.
Actual sentiment versus predicted sentiment
Before the pandemic, variation in sentiment could be largely explained using standard macroeconomic variables. In particular, a model that predicted sentiment using the unemployment rate, the inflation rate, aggregate consumption, and the performance of the stock market can explain 77.4% of the variation in sentiment over 2005–2019 (see Figure 2). However, over the last few years, this relationship has broken down, with a wide gap emerging between observed sentiment and predicted sentiment based on the state of the economy.
In simple terms, the puzzle we are examining is as follows: At most points in time over the past four decades, if consumers lived under an identical macroeconomy as they have now, their feelings about the economy would have been largely positive. But now this is no longer true; consumer attitudes about the economy are instead near all-time lows.
In sum, several trends suggest that consumer sentiment is not wholly driven by rational and accurate perceptions.
Real spending on international travel and the volume of travelers going through Transportation Security Administration (TSA) checkpoints have rebounded back to their pre-pandemic levels. Real spending on air transportation has skyrocketed more than 40% above its pre-pandemic level.
CEO confidence itself remains above its pre-pandemic level. By this metric, businesses have been optimistic about the growth of the U.S. economy.
Possible explanations
If economic conditions are strong, and people are behaving in a way that reveals some optimism about the economic environment, why is sentiment so weak? Analysts have advanced an array of possible explanations. One possible explanation, offered by Greg Ip of the Wall Street Journal, is that peoples’ views about the general state of the world and country spill over into their views about the economy. Ip refers to this as “referred pain,” and notes that events like “intensifying political and cultural conflict and intolerance, the pandemic, the border, mass shootings, crime, war in Ukraine, and now the war in the Middle East” may be negatively affecting views of the economy, even if national aggregates tell a brighter story.
Such an explanation is certainly possible, although difficult to test since the non-economic factors that may be causing referred pain are difficult to identify. Moreover, several of the factors identified by Ip are actually improving over the period of interest. For example, in the first half of 2024 most violent crimes occurred at or below pre-pandemic levels, with less frequency than in the preceding 4 years, and the U.S. withdrawal from Afghanistan in 2021 means our nation is not at war for the first time in two decades.
Another plausible explanation, advanced by economist Jason Furman at a Brookings Institution event in January 2024, is that the pace of cumulative wage gains in the post-pandemic era is markedly slower than the years immediately preceding the pandemic (i.e., 2014–2019). Indeed, relatively slower real wage gains could plausibly be a factor behind the sentiment puzzle. However, several caveats are warranted. One, discrepancies in cumulative real wage gains are highly sensitive to the measure of wages, the inflation deflator, and the periods of comparisons. Three, if cumulative real wages drove sentiment, it is not clear why older households—with sharply lower rates of employment—would have reported a concomitant drop in sentiment.
Another proposed explanation for the disconnect between sentiment and fundamentals is that people are receiving more negative news about the economy despite the underlying fundamentals.
Ivory Tower Thinking
Wow what an amazing consortium of ivory tower thinking.
For starters, crime is high. Please note The Committee on Oversight and Accountability is investigating the Federal Bureau of Investigation’s failure to compile and report accurate, complete national crime data.
In 2023, the FBI initially reported an estimated 1.7 percent decrease in violent crime in 2022 but later quietly revised the report to show a 4.5 percent increase––a staggering 6.2 percent change.
The Biden-Harris Administration championed the purported decrease, but there was no decrease. The FBI failed to include in its initial count “an additional 1,699 murders, 7,780 rapes, 33,459 robberies, and 37,091 aggravated assaults,” resulting in not a decrease but an increase in violent crime of 4.5 percent in 2022. The FBI quietly revised the report to reflect this increase in violent crime but did not publicize it.
And CEO confidence is up. What a hoot. It’s shocking, shocking I say, that people are not thrilled about the number of billionaires the US has created to balance out those worried about being evicted.
Brookings also blamed politics. On this theory, Republicans are upset at Biden more than they should be, despite the fact that Biden is heavily despised by those not living in an ivory tower.
Let’s leave the ivory tower for a moment and live in the real world.
A Breakdown, by Sector, of the Negative 818,000 BLS Job Revisions
On August 22, 2024 I gave A Breakdown, by Sector, of the Negative 818,000 BLS Job Revisions
Those negative revisions are a direct result of the BLS Birth-Death model gone haywire.
Job Openings Drying Up
Job openings and quits are for September and not impacted by Hurricanes
November 1, 2024: Nonfarm Payrolls Rise a Mere 12,000 with Government Jobs Up 40,000
Job openings and quits, not impacted by hurricanes, put an additional spotlight on the poor October jobs report.
Nonfarm Payrolls Rise a Mere 12,000
Blame hurricanes if you like, but the impact is debatable. Only Hurricane Milton was in the reference period.
Data from the BLS, chart by Mish
November 1, 2024: Nonfarm Payrolls Rise a Mere 12,000 with Government Jobs Up 40,000
Job Stats vs One Year Ago
-
Nonfarm Payrolls: +2,173,000
-
Employment: +216,000
-
Full Time Employment: -1,000,600
Employment is up 216,000 in the past year? But how?
Change in Employment Excluding Government
Please consider Excluding Government, Year-Over-Year Employment Is Negative 9 Straight Months
I created the above chart by subtracting the year-over-year change in government employment from the year-over-year change in employment.
Non-Ag Employment Excluding Government
Non-agricultural employment excluding government peaked in August of 2023 at 138.026 million and is now 137.240 million, down 786,000 since the peak.
Unemployment Rate
The unemployment rate hit a 50-year low in January and April of 2023 at 3.4 percent. It’s now 4.1 percent.
“The unemployment rate has bottomed this cycle and will generally head higher.”
I first made that comment many months ago. If there was any doubt, it’s now erased.
The Housing Boom Economists Expected in 2024, Was a Bust
On October 26, I commented The Housing Boom Economists Expected in 2024, Was a Bust
The widespread theory (not in this corner) was the Fed would cut rates, mortgage rates would tumble, and that would stimulate existing home sales. What Happened?
Record High Home Prices
On September 28, I reported Yet Another Record High for Case-Shiller Home Prices
The pre-pandemic Case-Shiller national index was 370.9. Now it’s 553.1.
Home prices are up 49 percent in less than five years. And thanks to Fed QE wizardry, people could have and did refinance their mortgage at 3.0 percent or even less.
Phoenix Leads the Nation in Evictions
It’s not just Phoenix, or Arizona. Evictions are soaring in Texas and Nevada as well.
On October 30, I noted Phoenix Leads the Nation in Evictions, It’s a Yes-No Question
The question is: Did you pay the rent? It doesn’t matter why.
The Fed has destroyed housing with its boom-bust interest rate and QE manipulations.
A $150,000 House in 1988 Now Costs $707,500
August 10, 2024: A $150,000 House in 1988 Now Costs $707,500 Thank You Fed
The above chart represents the mortgage payment of the same $150,000 house reflecting the changing price and interest rate over time.
Case-Shiller Home Prices
September 28, 2024: Yet Another Record High for Case-Shiller Home Prices
Mortgage Rates Hit 7.0 Percent Again
October 28, 2024: Mortgage Rates Hit 7.0 Percent Again, Where to from Here?
With record home prices and mortgage rates back above seven percent, who can afford to buy a home?
Fed Beige Book Shows Only 3 of 12 Regions Growing, 3 Declining
October 23, 2024: Fed Beige Book Shows Only 3 of 12 Regions Growing, 3 Declining
The Fed Beige book shows a mostly steady economy in 6 of 12 regional reports. “Steady” is in context of the the worst Beige Book in years.
The Immigrant Crime Spree is Real
October 21, 2024: The Immigrant Crime Spree is Real, Not Imaginary, Thank Harris and Biden
Four years of open borders and sanctuary policies have brought criminal drug networks, human trafficking, and an epidemic of sexual assault.
Living Paycheck to Paycheck
Bank of America has an interesting report on who’s living paycheck to paycheck (PTP). It’s not just the poor. Blame the Fed.
Please note 20 Percent of Households Making Over $150,000 Live Paycheck to Paycheck
And that’s by a strict definition that only includes rent, food, insurance and other necessities. Over 40 percent live paycheck to paycheck.
Dear Brookings, Here’s Your Paradox
-
Negative 818,000 job revisions
-
Job openings crash
-
Full Time Employment: -1,000,600 from a year ago
-
Total employment: only +216,000 from a year ago
-
Excluding government, year-over-year employment is negative for the last 9 consecutive months
-
Non-agricultural employment excluding government peaked in August of 2023 at 138.026 million and is now 137.240 million, down 786,000 since the peak.
-
The unemployment rate is up 0.7 percent from the low at a pace that strongly suggests recession.
-
Home prices are up 49 percent in less than five years to new record highs.
-
A $150,000 house in 1988 now costs $707,500.
-
The mortgage rate is back above 7 percent.
-
The share of first-time buyers of existing homes is at a record low.
-
The Fed’s Beige Book looks very recessionary
-
The immigrant crime spree is real. The FBI lied about the crime rate dropping.
-
Evictions are at record highs in many states and might be everywhere were it not for eviction moratoriums.
And the Brookings Institute cannot figure out why sentiment is in the gutter.
Then again, the stock market is at an all time high. And CEOs are traveling more. That’s quite the paradox.
It must be Trump.
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