Opinion | The vibrations in the economy are … weird. Very strange.

Economics is the story of what people do: how we spend money and time, the quantitative and qualitative aspects of our existence. When that story gets too loud to play, people start expecting the worst. The conflicting narratives about the state of the economy are colored by conflicting interpretations of those narratives, and discerning what is actually happening in the economy becomes nearly impossible. What people expect may soon happen and right now, with the data deteriorating, many people’s expectations have come together to expect a recession. And these expectations could very well lead to one.

Gross domestic product shrank in the second quarter of 2022, continuing a decline compared to the previous quarter. These GDP figures were the icing on the cake of bad news: a 9.1% rise in the consumer price index, skyrocketing house prices, and a declining job market, as evidenced by an increase. unemployment claims.

Economic indicators are a Jackson Pollock painting of data points and trends. If you think about it hard enough, they start to make sense, but there is a lot to interpret. Economists have basic theories of what the economy should do, but a pandemic, war, and supply chain problems have widened the gap between the “reality” of economic data and people’s experiences of that reality. If we are not careful, wrong assumptions – what John Maynard Keynes called “animal spirits” or what economist Fischer Black called “noise” – will fill that gap and fulfill our worst expectations.

About 70 percent of GDP is consumer spending, which is largely driven by consumer sentiment. How you, me and everyone else feel about the state of the economy determines what and how much we buy. Recent consumer confidence metrics have been weak, with the Conference Board’s Consumer Confidence Index falling to its lowest level since February 2021. According to data from the Bureau of Labor Statistics last week, adjusted wages for the ‘inflation has fallen 3.1% over the past year’, and as prices rise, purchasing power continues to decline. It is almost impossible to enter the real estate market, as house prices have risen by 40‌ percent over the past two years. In general, consumers are not feeling well right now about their ability to afford anything.

Many blame inflation on corporate price devaluations, and there is certainly some truth to that. However, many companies’ earnings expectations are collapsing as they too struggle with higher production costs. Several retailers are entering an environment where their inflation becomes deflationary as the excess inventory they have ordered to combat supply chain uncertainty is now reduced in an attempt to sell them.

A budget constraint for both consumers and businesses is the lack of basic necessities such as natural gas and oil. When energy prices go up, everything has to go up in price and this can have a double impact on costs for consumers.

The Federal Reserve, the latest vibe setter for both good and bad, is going into “Fast and Furious” mode to try and fight inflation. The Fed’s main tool now is to worsen the general vibes by managing demand by raising rates and making it more expensive for people to buy things.

People’s perceptions shape the economy, but those perceptions are shaped by the Fed. The risks of accelerating too fast are now particularly high, as plummeting GDP and other economic indicators show the economy is already slowing. If the Fed raises rates too high in this environment, it risks a recession.

The Fed is doing all it can to achieve a “soft landing”, which comes with risks. As we all know, the Fed cannot plant corn. He can’t make boats go faster. In essence, Federal Reserve Chairman Jerome Powell’s toolbox is lowering his glasses and sternly saying, “Hey, stop buying so many things,” in an effort to normalize the forces of supply and demand.

The problem is that demand doesn’t need to slow down any further; it is already happening. Instead, we need supply-side changes – more workers, more goods and more services – that require more than just monetary policy.

The vibrations in the economy are … weird. That oddity has real effects. A recent study found that wider vibes actually drive what people do, with media narratives about the economy accounting for 42% of the decline in consumer sentiment in the second half of 2021.

Indicators such as GDP are important, but most of the time the root of economic problems lies in expectations. When we think about things like inflation, financial conditions and monetary policy, it’s best to frame them through people. And people are obviously silly and messy. Too many economists and experts forget that the economy is actually a group of people who “populate” around and try to make sense of this world.

When politics is more focused on indicators that may not fully reflect reality, and not on the foolish and disordered people the policy is intended for, we enter dangerous territory.

There isn’t a recession yet. Right now we are in a kind of “vibe-surrender” – a time when the dropping expectations people feel are based on both real-world concerns and past experiences. Things don’t work out. And if they don’t improve, we will have to worry about more than negative vibes.

Kyla Scanlon (@kylascan) founded the financial education company Bread and produces newsletters and videos on the economy. Before starting his own company, he worked at Capital Group and an education start-up.

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