Is the Economy as Bad as People Think?
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Walk on the money for the rest of us. This is a personal financial on money, how IT works, how to invest IT and how to live without worrying about IT. I'm your host, David.

Stand today is episode four seventy two. It's title is the economy as bad as people think? In the U.

S. The unemployment rate has been under four percent for two years. That's the best stretch of unemployment since the one hundred and fifties.

The latest inflation numbers, the U. S. Consumer Price index IT, increased only three point two percent for the year ending february twenty twenty four.

That's downs' stantons from twenty twenty three and twenty twenty two. Real wages for U. S.

Workers are higher now than they were prior to the pandemic. In other words, U. S.

Workers, after dusting for inflation, are making more money than they were four years ago. Yet surveys of U. S. Consumer sentiment show not only did consumer sentiment he its lowest level ever in mid twenty twenty two, but the level of consumer sentiment is still well below what IT was prior to the pandemic.

Why is there this disconnect between economic progress and how we feel about the economy? That's what will explore in today's episode. But first gone to recognize that, yeah, the economy is doing Better and aggregate, but it's always doing worse for somebody, individuals who have lost their jobs, individuals who can't afford to pay rent.

I was speaking with a friend yesterday that lives in phoenix and has had to downgrade their living situation because rents have shot up so high there and in many other places around the country. First, let's take a look at how consumer sentiment is measured. One of the longest running surveys of consumers is the universe of the a michigan survey.

IT started in one thousand and forty six, and they do an index of consumer sentiment and is derived from five core questions. They are consumers about their personal financial situation today compared to a year prior. They ask consumers about their expectation for their personal financial situation a year from now.

They ask about overall economic conditions and to rate the current economy. They ask consumers about their short term economic outlook and for their long term economic outlook. For the next five years, five hundred consumers are sampled each month. The way that the survey's work is the base index level is one hundred. That's back in one thousand nine hundred and sixty six.

And if we look at the latest is our preliminary results for march twenty twenty four, they were just released this morning and IT shows that the index of consumer sentiment at seventy six point five, so down slightly from february, but still twenty five percent below what IT was prior to the pandemic. Now there's been a big increase in consumer sentiment. It's up twenty nine percent from what I was back in november twenty, twenty three.

And that's the biggest two months increased since nineteen ninety one. So has been some improvement, but consumers still are cautious and dispirited regarding the U. S. economy. That's for the overall index of consumer sentiment.

If we look at the current financial situation versus a year ago, there's a fifteen percent of points of gap in terms of those that feel worse, worse about their situation now verses a year ago compared to those who they feel that they're Better off, more feel worse than feel Better off. And then if they are asked what is causing that economic, asked why consumers feel worse off, why are they've have a negative look on U. S.

economy? IT comes down to higher Prices over forty percent, give higher Prices, inflation, Price increases, as the reason they feel worse about their personal finances, which amazing about that is if we look at economic data, looking at the growth in real earnings since before the pandemics. So going back to third quarter twenty nine, and this stata goes through the third quarter twenty, twenty three media real wages.

So after backing at inflation at one point seven percent for lower income workers, there are up three point two percent. In other words, earnings are growing faster than inflation. And yet consumers still aren't feeling very sanguine about the economy.

Of course, whether you're earnings are outpacing inflation depending what you buy because we each have a personal inflation rate. One statistic I saw is U. S. Consumers and outspending eleven point four percent of their disposable personal income on food for the first time since one hundred and ninety one. And that's because food Prices have increased more than the Prices of other areas.

The way that consumer Prices are measured for the increase in consumer Prices inflation, there is a basket of goods and services that make up a reference basket, and there are are hundreds of good and services that make up the consumer Price index, and some are seeing Prices go higher than others. And so their weights change. And so we've seen comparing twenty twenty three compared to prior to the pandemic in twenty in nineteen, that transportation cost and food embeds ages have increased, make up a greater weight of spending.

Now because of the inflation levels of those goods and services over the past year, consumer Price inflation U S. Has increased three point two percent, but it's up eighteen percent. Over the past three years, gasoline is up thirty eight percent.

That's one reason. Transportation cost, which includes gasoline and vehicles. So why that makes up a higher percent of the average consumers? Basket of goods and services that they purchase? Rent on primary residences is up twenty percent.

Food, both eating out and bringing IT to homes, up twenty one percent over the past three years. New and used vehicles, up nineteen percent over the past three years. When you see these type of Price increases, you notice that we have what are known as reference Prices.

So in our minds, we think, well, this is what IT cost. And if we've had a lengthy period of a fairly stable Prices, small increases leading up the pandemic and then suddenly were faced with twenty percent plus increase, is and if it's a certain good, good that we have a reference Price force. So for example, and the prony travelling in california, visiting some family, and the prel needed some medicine that showed up at our house and two son a day after we left.

And so we asked her daughter to overnight us this small package. The ups are wanted one hundred and sixty eight dollars to overnight IT. Now my reference prize for overnight packages is closer to thirty dollars because we used to send out report to our clients when I was an investment adviser.

These the performance reports for and downers and foundations and and we packed at him up. And in my mind, might he locked into a bed of thirty dollar Price? Now, obviously, they've gone a pire than but one hundred and sixty eight dollars is so far out of our metro accounting for packages.

There has been increases in other areas. If we look at dozen of sixty five percent higher today than IT was in fabric c twenty twenty. This is data from nilson I Q.

Cooking on us fifty four percent. Dog food, fifty six percent higher. And and that's first treating the people because they are seeing these Price increases in areas where they have a mental picture, what the Price should be. And IT makes people angry. So one article IT referenced an individual name, mark oin, who started listening to company earnings calls to understand what why are Prices for for staples going up, such as milk up twenty percent since favorite ite twenty twenty SHE says it's unfair and it's not sustainable and nobody will explain. IT SHE is sixty five year old substitute teacher in pensylvania ans.

She's she's traded down, so she's buying a cheaper brand of dog food and not having some of the treats that he used to have at least is frequently another individual, Taylor craft d thirty one, has a reference Price for going out to eat at Polly, getting a classic chicken bowl with chips, qualcomm I and a drink. He recently paid twenty dollars. His reference Price was eight dollars.

Steward riden typically bought goods from craft or hind and looked at at craft. Single cheese slice is seven dollars and sixty nine cents for twenty four packed prepared to two ninety nine for the store label. So you're not only you seen higher Prices, reference Prices, but the gap between name, brand, consumer items in private label or store items is has increased what causes that big Price difference? Well, a big driver of the cost between a name brand consumer good, like craft cheese and a store bot brand is craft hides and announced twenty five percent increase in what they spend on advertising.

In the third quarter, they spent seven hundred and fifty million dollars on marketing cost, including of their six point six billion dollars in revenue, much of the the differences marketing cost related to convincing us that the name brand goods taste Better or are Better. We've had a severe bout of implant in the U. S.

And around the world, nineteen percent increase since prior to the pandemic, the causes of IT we've discussed, but let's review them. There was massive supply disruptions due to the pandemic, terms of shipping in terms of workers being able to get to work to produce goods and services. We've had an energy Price shock with this invasion of ukraine.

So they've been supplied disruptions but has also been shifting demand due to the pandemic. During the first few years of the pandemic, household and businesses bought more goods and less services. And then I switched to, as the economy opened up, people could travel more.

More was going toward services. There were worker shortages, as many workers are retired and haven't return, return to the workforce. Those are temporary supplied disruptions, shifting demand.

Companies can adapt to that. But the biggest driver was the massive amount of new money created. There was a forty percent in the money supply, with the money supply being cash checking and savings accounts, retail money market funds. The overall money supply went from fifteen point three trillion dollars prior to the pandemic to twenty two trillion dollars.

And that was the result of the federal government running double digit budget deficit, the percent of the economy and the federal reserve pursuing quantitative easing purchasing bonds in the marketplace with newly created money bad combination of a federal budget deficit, and the central bank effectively monetizing that budget deficit with newly created money LED to a huge increase in the money supply combined with the capacity constraints. That's why Prices are up over twenty percent since prior to the pandemic. And all that money influences other areas of the economies, such as home Prices, leads to higher rent, greater homelessness.

I mention my friends had a downgrade. They're living situation to go to a place where they could afford the rent because the rent of their existing place went up over thirty percent. And then as the central bank has tried to combat this inflation, which Frankly they were responsible for, at least much of the blame goes to the central bank.

The feat reserve. They've had a race, their policy rate to where it's over five percent, I LED. The higher long term rates and higher mortgage rates in which doesn't make first time home buyers particularly happy, makes them more difficult to get housing.

So yes, the economy, the unemployment rate is under four percent. Inflation is coming down. But the thing about inflation is IT doesn't go in reverse.

Prices don't fall and they do fall for some areas. And they have television sets, for example, are cheaper today than they were. Personal computers are cheaper today.

Now this adjust for quality improvements. Airline fares are cheaper today than they were tired at twenty nineteen. But I agreed that if the money supply increased, forty percent more money flowing through the economy, we're not going to see Prices fall.

And if a reference Price is back twenty percent lower than IT takes a while to adjust. Before we continue, let me pause and share some words from this week. sponsors.

Now that's one of the main reasons that surveys indicate consumers aren't very happy that they don't feel positive about their financial situation and is because of this Price shock of inflation. The other, though, is that feeling of uncertainty that came from the pandemic. If you think about that, it's been four years, much twenty, twenty, when the economy was shut down around the globe.

And we we work from home. Many people lost their jobs. Remember going to the grocery store and seeing shelves empty, which i'd never seen in my life.

In early favorite twenty twenty, we released an episode about pandemics and point IT out that the largest pandemic in the modern era was the nineteen eighty influencer pandemic, estimated at five hundred billion people, or one third. The worlds population was infected, and fifty million died worldwide, including six hundred and seventy five thousand in the us. The deaths were so large because there wasn't a vaccine and they weren't antibiotic, so people just had the icing coranto ine.

And when I published that in early february twenty twenty, I thought and said as much that COVID chron virus unlikely to get that bad if four years later estimated that seven hundred million people around the world have gotten covered, that numbers probably higher than that seven million people hospital in the U. S. A million have died.

So more people died from covet in U. S. Than during the blue pen america.

Nineteen nineteen. Now the flup handel mi c. In terms of percentages and setter was was worse. But for most of us, this is the worst public health crisis we've seen in our lifetimes, and that has an impact on our feeling of uncertainty.

Special education teacher in tennessee said, I like the feeling of not living on the edge of disaster. I met my fullest potential economically right now, but i'm still one doctors visit away from not being there. And pretty much most people I know are.

We've had a health shock and Price shock and combine our world view, in many cases, have been substantially altered. We feel less certain, less confident. Our reference Prices for what we used to pay been obliterated because Prices of increase twenty percent.

Things will get Better. Like anything, we will gradually adapt. Inflation is coming down. We get new reference Prices and we change our behavior. The pro, I don't eat out as much as we did, and we are splitting on trace, more sharing meals. And we're not by any means turning financially.

But it's just that, that psychological feeling like, oh, they're trying to Prices are too high and the business is they are they're not gouging. In most cases, their cost are going up. They're trying to pass IT on.

Some have taken advantage, i'm sure, but not most because they are seeing push back from consumers then. And when is reported that their guest counts fell? A number of people that visit to the restaurant fell in twenty, twenty, twenty three compared to twenty twenty two.

Take with those with lower incomes because the Prices are so high. Again, we we gradually will adapt. Our software developers that we use is based in K, F, ukraine.

And we've had discussions to how they've adapted, at least in K, F, two awar situation. And you just were very adaptable as humans. Now they would.

They like IT to be Better than IT is absolutely. They've adapted to the fear in a certainty of war and and still participating. In some ways, theyve mention that things seem more Normal, but they're not.

And that still showing up in the survey data in the U. S. And in other places, consumers are still discounted about the economy.

And one of the things are, remember from one of my professors in graduate school, is people vote with pocket books. As we look toward the presidential election in november, the economies front center, as IT usually always, is every election. And it's why politicians like to take credit when the economy is doing well, even though they have nothing to do with that.

In many cases, the governor of arizona, the state were resonant of katty hubs, recently had a press conference and said we're doing a lot to lower Prices for arizona and pointed out that inflation was under the national average now that she's been in office for a year and inflation rates are much lower. And when journalists and economist ask what exactly has her administration done to lower Prices, what specifically, they didn't have an answer. Her, her pressed Christian leaders said, the results speak for themselves, but inflation is a multifaceted.

The economy is is a complex adaptive system driven by narratives, driven by stories of all these inputs. And reality is, a state governor has been an office a year is not going to have an impact on inflation. And in many cases, A U. S. President isn't either, although the entire executive branch, the legislative branch and the central bank can have an impact on inflation.

And they did both the trump and biden administration through the cover relief packages that they passed, combined with the money creation from the federal serve, is the primary empties for inflation combined with the other things we've pointed out, the supply disruptions, the workers and and i'm not saying they shouldn't have passed relief. I'm just saying that all of these things come to together can lead to inflation shocks, Price shocks. And we had one and a health shock with a pandemic and and its left us feeling uncertain, less confident.

And that's why people feel bad about the economy. And it's gonna take many more months, if not years, to adapt and adjust to the way things are. But we can and we will.

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