I am sorry but I’m going to keep ringing this bell about the disconnect between voter sentiment on the economy and the reality of the economy because I think it’s a warning sign about something deeper going on with the country—a dangerous delusion that people are entering.
We’ll unpack that broader concern in a minute.
But before we start, let me stipulate to a few things so that I’m not misunderstood:
The economy is not perfect. It is a mixed bag. There are some good aspects and some bad aspects. For instance:
Low unemployment and strong real-wage growth are good.
Housing affordability right now is very bad.
Item #1 above is true in all times and all places.
Also perpetually true: There is tremendous economic stress for people raising families in America. Families are crazy expensive (I wrote a book about this) and the vast majority of American families just scrape by and are constantly having to make choices about how to spend scarce resources.
Likewise: It is hard to be a young worker just starting out and also hard to be a retiree on a fixed income.¹
Finally, I would not keep harping on this subject if the general sentiment in the country was, “Eh, the economy is okay but we really wish it was better.”
Instead, the general sentiment seems to be “These are Dust Bowl days! Someone must do something!”
This view seems insane to me.
With all of that out of the way, let’s move on.
The National Federation of Independent Businesses released a report looking at how things are going for small business owners versus how SBOs think they’re going.
It is fascinating.
For starters, look at this chart showing expected sales plotted against actual sales:
Notice that small-business owners are always too optimistic about sales—but since 2020, actual sales have been beating their expectations consistently for the first time since the survey began.
Now let’s look at what the NFIB calls the “optimism index” in which they chart two baskets, which they label “hard” and “soft” indicators
The “hard” indicators includes measurable items such as sales, profits, job openings, and capital expenditures. The “soft” indicators are all attitudinal stuff from surveys of small business owners.
That’s right—this is the widest gulf between what’s actually happening in business and what small-business owners think is happening in the history of the survey.²
You look at these lines and tell me how it makes rational sense. ¯\_(ツ)_/¯
Now let’s pivot to consumers. The Economist did a deep dive recently on consumer sentiment and plotted survey data against actual economic data and concluded that the pandemic had “broken” people’s perceptions.
I’m going to explain this chart to you in detail in a minute, but basically what you’re looking at is where consumer sentiment should be (the dark blue line) versus where it is (the light blue line).
Here’s the Economist explaining:
Changes in consumer sentiment are normally a useful economic benchmark. The longest-running measure comes from a survey by the University of Michigan, which began in 1946. Each month it asks a representative sample of 600 Americans a set of five questions probing their opinions on their own finances and spending, the state of the wider economy, and the outlook for both. For most of the past four decades the index has moved in lock-step with changes in current consumer spending, and also loosely predicted spending a year ahead. . . .
[S]ince 2020 the mix of economic indicators that shape sentiment has changed, and as a result the measure has lost its predictive power.
The first study highlighting this pattern was published last month on X (formerly Twitter) by a researcher using the handle “quantian1”, who chose to remain anonymous. Extending this analysis, we built a statistical model to predict the monthly consumer-sentiment index between 1980 and 2016 using a broad battery of economic data. A combination of 13 variables, including inflation, unemployment and petrol prices explained 86% of the variation in the index in this period, a very good fit.
Before the pandemic, the relationships between these indicators and consumer sentiment were relatively stable. When tested on data from 2017-19, the model trained on the 1980-2016 period reliably predicted sentiment, with only small errors. However, covid seems to have severed this link, making the model’s projections wildly inaccurate. If the pre-2020 associations still held, today’s score would be 98, some 30 points above the actual value.
Although Americans report being worried about their finances, they are behaving as flush as ever—and in economic forecasting, actions speak louder than words. When used to project future spending rather than consumer sentiment, the same battery of economic variables has fully maintained its forecasting power since 2020. In contrast, since covid began, the correlation between sentiment and both current and future spending has vanished.
Again: I hear every person who says that times are tough for them and I honor and respect that. But in the aggregate, people’s views are not just a little bit off.
They are wildly out of sync with reality.
Finally, let’s talk about households. Here’s Ben Carlson unpacking the recent Fed report on household wealth in a post headlined “Americans Have Never Been Wealthier and No One Is Happy.”
Real median net worth for U.S. households was up a stunning 37% from 2019-2022.
This is just a massive increase in wealth considering the fact that 2022 was one of the worst years ever for a diversified portfolio of stocks and bonds.
But Ben what about inflation?!
To be clear, these numbers are inflation-adjusted.
And while net worth grew 37%, total household debt grew less than 4% from 2019-2022. Sign me up for that every three years, please.
He then gives a chart which I’m going to annotate in red in order to turn this economic story into a political one.
You can see the story, yes?
In 1992, George H.W. Bush loses decisively because the country is coming out of recession.
In 1996, Clinton wins reelection comfortably because the economy is doing well.
In 2004, George W. Bush wins comfortably because we avoid recession.
In 2012, Obama wins a narrow re-election because the recovery from the enormous declines of 2008/2009 is real, but slower than people wanted.
If you only went by household wealth and were asked to predict the 2024 election, you’d assume that the sitting president was a slam dunk for re-election.
But that’s not where we are.
2. Green Pilled
The reason I keep hammering this subject and arguing with Tim and Sarah isn’t because I think everything is great and everyone should be happy. (See the caveats above.)
I’m also not doing this because I want to argue people into feeling better about the economy.
And finally, I understand that you can construct an argument that partially explains some of the sentiments we see from voters. If you cherry-pick, and squint, and do a lot of psychoanalysis.
Here is why I keep talking about this: Because something is wrong here.
All of the arguments about why people feel the way they do are post facto rationalizations—if you were just looking at the data, you’d never think to make them. They are rationalizations to try to make sense of a general mood in the population that, fundamentally, does not make sense.
This may not be the Roaring Twenties, but the average American seems to think we’re in the Great Recession and we most certainly are not.
And it’s the existence of this disconnect that worries me.
When citizens of a democracy start constructing alternate realities based on their feelings, it’s a sign of something. Call it decadence, call it delusion, call it decline.
Whatever it is, though, only bad things can come of it.