The U.S. economy is robust and healthy, according to analysts, as seen by the booming labor market, rising salaries, and reducing inflation. The issue is that Americans don't seem to get it.
The U.S. economy is robust and healthy, according to analysts, as seen by the booming labor market, rising salaries, and reducing inflation. The issue is that Americans don't seem to get it. (Photo : by Alex Kotliarskyi / Unsplash)
The Rise of "Vibecession"
Many experts have coined the term "vibecession" to describe the disconnect between the optimistic economic data and the pessimistic consumer behavior. Vibecession refers to the idea that Americans are basing their opinions about the economy on "feelings" rather than reality.
For example, inflation has significantly decreased since June 2022, when it reached a 40-year high of 9.1%. However, according to a recent Wall Street Journal poll, over three-quarters of respondents in key states indicated they thought inflation was headed in the "wrong way."
However, there could be more than just depressing sentiments underlying Americans' pessimistic opinions, such as monetary pressures that aren't often reflected in statistics like the consumer price index, which tracks the rate of inflation. For example, the impact of higher borrowing costs brought about by the Federal Reserve's 11 rate rises to combat the highest inflation in 40 years is not captured by the CPI.
Put differently, the CPI, which tracks widely bought goods and services like food and apparel, does not immediately represent the fact that consumers are paying more for credit card debt and loans. In the fourth quarter, credit card debt hit a record $1.13 trillion, the highest level since the Federal Reserve began tracking it in 1999.
In a research paper published in February, former Treasury Secretary Larry Summers and his co-authors emphasized this problem, pointing out that borrowing costs have increased "at rates they had not reached in decades," which is increasing Americans' concerns about the cost of financing large purchases, such as houses and cars.
Customers will probably have to put up with exorbitant borrowing fees for some time to come. Although interest rate reductions by the Fed are anticipated later in 2024, some analysts have predicted that the cuts may occur later in the year due to recent economic statistics and stubbornly sticky inflation.
Last week, a Fed official hinted that the bank would not lower interest rates at all in 2024, indicating that consumers and companies won't likely see any improvement in their ability to borrow money anytime soon.
The most recent consumer price index data will be announced on Wednesday, providing a reality check on the rate of inflation. Forecasters predict that prices will increase by 3.4% annually in March, which is a little increase from the 3.2% pace that was recorded in February, according to financial data provider FactSet.
According to a recent Morning Consult research, inflation appears to be heading sideways even if it has unquestionably decreased from its previous peak in 2022. The Fed's target of a 2% annual inflation rate is exceeded by the latest inflation figures, and Americans still rank this as their top economic concern.
Some analysts have said that Americans should be optimistic about the state of the economy because salaries are now increasing faster than the rate of inflation. However, this ignores how customers really perceive pricing as well as the psychological effects of loss aversion, or the reasons why losing something (or having to pay more for products or services) has a greater impact than an equivalent gain.
Prices are rising despite the lowering inflation, but more slowly than during the post-pandemic inflationary spike. Although it could take some time, customers will probably ultimately adjust to these higher price points.
