An exploration with economist Noah Smith on why public sentiment about the US economy often contrasts with hard economic facts.
In a time when dubious media narratives about the economy often overshadow hard data, the latest episode of the WhoWhatWhy podcast features Noah Smith, the thought-provoking economist behind Noahpinion substack. Smith’s analysis of “vibes vs. data” sheds light on the interplay between public sentiment and tangible economic metrics in the US.
Smith says the US is unique in that economic perceptions here are more heavily influenced by emotion-driven narratives than by hard data. This contrasts sharply with Europe and Asia, where data and sentiment are more closely aligned.
For example, despite encouraging economic indicators like falling inflation and low unemployment, Smith points out a striking paradox: Consumer confidence in the US (as measured in opinion surveys) remains anomalously low even as consumer spending rises.
Smith notes that individuals tend to view their own financial situation more positively than the broader economy. Based on his understanding of the “vibes vs. data” disconnect, Smith makes some strong predictions about consumer sentiment over the next few years — with special attention to the potential impact of the 2024 elections and attendant political turmoil on economic confidence.
This episode goes beyond analysis; it’s a rigorously argued challenge to conventional economic thinking.
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(As a service to our readers, we provide transcripts with our podcasts. We try to ensure that these transcripts do not include errors. However, due to a constraint of resources, we are not always able to proofread them as closely as we would like and hope that you will excuse any errors that slipped through.)
Jeff Schechtman: Welcome to the WhoWhatWhy Podcast. I’m your host, Jeff Schechtman. There’s a growing gap between public sentiment about the economy and the story told by hard data. In an era where politics often grapples with alternative facts, we find economics wrestling with what might be termed alternative feelings. To truly grasp the state of our economy and its broader implications, it’s crucial to understand not just the numbers, but also the narrative that weaves through them.
Joining us today to unravel this narrative is my guest, Noah Smith. Noah is a distinguished voice in the realm of economics and a perceptive observer of societal trends. Noah isn’t just an economist, he’s a storyteller who skillfully dissects complex economic data, transforming it into narratives that are both accessible and compelling. His recent No Opinion Substack piece “Vibes vs. Data” ignites a crucial conversation about the US economy’s current state, challenging our perceptions and confronting the reality of economic indicators.
In his work, Noah investigates the contrasting perspectives of the US economy’s performance, particularly in the context of the upcoming election season.
He sheds light on the debate between Biden’s supporters who cite positive indicators like low unemployment and falling inflation, and opponents who emphasize the enduring impact of past inflation and ask questions about wavering consumer confidence. All of this creates a feedback loop where data interpretation influences feelings, and those feelings or vibes, in turn, color our understanding of the data. This is a phenomenon that is happening nowhere else in the world. It seems that only in the US does economics play out in two worlds.
Economics, often dubbed the dismal science, is typically framed around numbers and facts; but, with each day, it seems that the narrative of economics is winning out over hard data. In today’s world, where we are increasingly bombarded by a deluge of information from social media and the 24-hour news cycle, discerning truth from fiction even in economics becomes ever more challenging.
Today we’re going to try and dissect this conundrum with my guest, Noah Smith. Noah Smith is a former assistant professor of behavioral finance at Stony Brook University. He writes his own Substack, entitled No Opinion, and has also written for publications including Bloomberg, Courts, Business Insider, and The Atlantic.
It is my pleasure to welcome Noah Smith here to the WhoWhatWhy Podcast. Noah, thanks so much for joining us.
Noah Smith: Hey, thanks for having me on.
Jeff: Well, it is a delight to have you here. Let’s talk first about this gap that’s going on out there. And it’s been written about a bit and talked about a bit, and you nailed it profoundly in your “Vibes vs. Data” column, between what the reality is in terms of what the numbers show and the way people are feeling. Talk about that first.
Noah: Well, so, if you look at consumer confidence measures right now, they’re extraordinarily low. We haven’t seen them this low since the early 1980s, when inflation was still very high and unemployment had really soared due to our efforts to fight inflation. And the interesting thing about the economy right now is that inflation has come back down not 2 percent — maybe 2.5 percent, maybe 3 percent, depending on which measure you use — but it’s well within its normal low historical range, and employment is absolutely booming.
Pretty much everyone who wants a job has a job. If you look at the employment rate — that’s the percentage of prime-age working adults who have a job — it is at pretty much historic highs. And so everybody has a job and inflation has come back down. Real wages are rising again. And when you look at people’s wealth, it has also risen strongly in recent years owing to rises in home values and a few other things too.
So, really, it’s a bit of a mystery why consumer confidence is still so far down in the dumps. People have been arguing and there are basically two schools of thought here. One is that the numbers that people really care about aren’t the numbers that economists tend to trumpet and tend to use as their markers of what makes a good economy. And the other is that some negative narratives in the media have caused people to be more dismal and gloomy than they really ought to be, given the state of the economy right now. Those are the two interpretations that are duking it out in the public sphere.
Jeff: The other part of this is that when you ask people individually how their own personal economic situation is, they tend to say that it’s pretty good. We see, as you mentioned, an increase in consumer spending. The amount of money people are spending in restaurants is good. People are starting to buy cars.
Again, there is this sense that if you ask people how they’re doing, you get a positive response. If you ask them how the economy is doing, you get a negative response.
Noah: Right. And it’s not new. People are pretty much always more confident about their own personal situation than they are about the economy as a whole. Of course, it could be that people have just a lot of concern for the people at the bottom, the people who are doing the worst. So if 90 percent of people are fine and 10 percent of people lose their jobs and are on the welfare rolls and get kicked out of their houses and blah, blah, blah, you might say, “Wow, there’s so many homeless people on the street. I know so many people who got unemployed. Even if I’m doing fine, I’m going to say the economy is bad.”
These perceptions are not necessarily contradictory. It’s not necessarily true that people are telling an inconsistent story because people may have concerns for the most vulnerable members of the population who get hurt. That said, there is a notable disconnect here, because if you look at how the people at the bottom are doing, objectively, wages have risen more for the people at the bottom than the people at the top over the last few years by quite a lot. And unemployment is extremely low, which disproportionately benefits the people at the bottom who depend on having jobs to live.
They don’t have a cushion of wealth, they don’t have high income, and their employment tends to be more contingent and vulnerable. The people at the bottom of American society are actually doing better now than they’ve been in any time in recent memory. And so that makes it very difficult to square the perception of personal financial well-being with the perception of a crappy national economy.
Jeff: As you point out in your piece, this is something that is uniquely American, this disconnect between personal feelings and the sense of the larger economy doesn’t exist to the same degree in other Western European economies, for example.
Noah: That’s exactly right. So that’s really part of the mystery here. The mystery is that when you correlate the real economic data with consumer sentiment in other rich countries like European countries, for example, the economic sentiment just tracks these real economic numbers very, very closely. And then if you look at America, until 2020, economic numbers track sentiment very, very closely. And then since 2020, there’s been this yawning gulf where American consumer sentiment has been much, much more negative than the economic numbers would seem to warrant, and we’re the only country where that’s happened.
And so it’s this very unique and unusual divergence we’re dealing with, and that has powered a lot of the arguments for vibes being the reason here.
Jeff: It’s interesting because when you talk about the change happening or the disconnect happening in 2020, it would be easy to say that somehow, it’s part of a hangover from the pandemic and attitudes that grew out of that; but again, the pandemic was everywhere, not just in the US.
Noah: Right. Exactly, and in some places, it was quite worse. It could be the pandemic interacting with some unique features of American society. Maybe we handled the pandemic differently, but yes, I don’t think you can just say, “Oh, look, it’s the pandemic obviously,” because it’s not happening in other countries.
Jeff: And it also cuts across various demographic and age groups as well.
Noah: Right. That’s absolutely true.
Jeff: In fact, you had a poll in there with respect to young people who feel exactly the same way.
Noah: Yes, that’s right.
Jeff: Talk a little bit about what people perceive as a wealth gap in the country and how that might be a part of this.
Noah: Well, it’s interesting when you poll people on wealth inequality, the amount of wealth inequality they think exists is much lower than the amount that actually exists. So it’s very difficult to say. I can toss out all kinds of conjectures.
For example, I think America probably is more tolerant of wealth inequality than say, Japan, where I lived for several years. Because it’s not just culture; it’s the fact that we’re isolated. Rich people in America live in gated communities, far away, in far-flung suburbs that you never, ever see.
I have some rich friends and when I go visit their houses in Marin County or the Peninsula or whatever, these are vast estates. These are mansions. These are compounds and normal people never see those. You just walk around and you see the houses in your own neighborhood. And so I think our visible inequality might be less than if the same trends manifested. Like if someone had a huge mansion right in the middle of downtown, you’d see it, or right in the middle of a middle-class suburb, you’d see it. And so I think that, to a certain extent, wealth inequality is hidden. I don’t think inequality is what’s driving these negative perceptions.
Because if you look at the inequality numbers, wealth inequality has actually ticked down for about a decade. Wealth inequality was a little bit higher in 2013 than it is now. And wage inequality was higher in 2013 than it is now. And so inequality has gone a little bit down over the decade, not hugely down, but a bit down, and yet we’re so much more negative. So I really don’t buy that as the explanation for this negative sentiment.
Jeff: Right. Indeed. I mean, when you look at— there were some numbers from the Fed recently saying that I think 12 percent of American families now could be classified as millionaires, and that 8 percent are mega-millionaires. And those numbers keep going up.
Noah: Right. It’s hard to say how wealth affects these numbers. Unfortunately, wealth can be hard to measure, but we have some pretty good numbers that say that in 2022 — which was not an especially economically good year, it was actually a pretty crappy year given all the inflation — wealth for the average people and especially for people at the bottom of the distribution had increased substantially since 2019. And it was astonishing to me how broad this increase was.
So for example, young people’s wealth went way up. People with no high school diploma, their wealth went way up. Black people’s wealth went way up. Hispanic people’s wealth went way up. Renters and rural people, their wealth all went way up. And so it is a lot of these people who have historically been left out of the wealth race that are seeing these big percentage increases. For example, from 2019 to 2022, Black people’s wealth in America increased by 60 percent. And for people with no high school diploma, just from 2019 to 2022, their wealth also increased by 60 percent.
Those are big percentage increases. Those groups aren’t very wealthy groups to begin with, so if their net worth is $5,000, then a 60 percent increase brings it to $8,000. That’s not a huge life increase, but in percentage terms it’s up a lot more than it has been in recent memory. And remember that 2022 was this crappy year when we had all this inflation. So basically, I’m dubious of wealth as the explanation for the negative consumer sentiment.
Jeff: I want to talk about the fact that post-pandemic, there was a sense of lots of money sloshing around. People had a lot of money that they had squirreled away during the pandemic, there was a lot of cash floating around, interest rates were near zero. There was this tremendous sense of prosperity and pent-up demand right after the pandemic. Then reality set in, all those savings that were put away started to go away. We see an increase in credit card debt even though we see an equal amount of consumer spending. The landscape changed. I wonder to what extent that played a role.
Noah: So that is really interesting because that’s one of these explanations. America was much more generous than other countries with pandemic benefits. We gave out a lot more money during the pandemic than France or Britain or any of these countries. Only Canada came close to us. And we really just splashed money all over the economy and then that went away. And like when you come back to your house after a vacation, and you feel this intense letdown.
Jeff: Right.
Noah: Right? Maybe there’s this letdown from the pandemic era when suddenly you were working from home, yes, you couldn’t see anybody because of the pandemic for a little while, but then you were working from home and the government gave you all this money and then that couldn’t last. That’s not a permanent sustainable thing. If you look fiscally, it’s just not sustainable. Resource-wise, it’s not sustainable. But yet the end of that probably gave people a letdown.
And because America’s programs are so much more generous than other countries’ programs, it’s possible to me that this is one reason why America’s consumer sentiment has become more negative, because people are missing those pandemic benefits.
Jeff: Talk about the other reasons that you see for this feeling.
Noah: So besides pandemic benefits, I see a couple of other things. Number one, we had high inflation that started really rising at the beginning of 2021, and it really reached a peak in late 2021, early 2022. We had a year to a year and a half of high inflation. And this did all the things that a burst of high inflation typically does. It lowered [real] wages because when prices for groceries and rent and whatnot go up and wages don’t go up to match, then your real purchasing power falls and you get poor. And so that happened, and we haven’t completely recovered from that yet. [Real] wages are still down from where they were in mid-2022, but they’re down from March 2022.
I think that will take a long time for people to get over. I don’t think people’s confidence will simply snap back. I think that when you look at the economic statistics that people had used to predict consumer sentiment before, you didn’t see this quick rise and fall in inflation. And in fact, in America, the rise and fall in inflation has been much faster than in other rich countries, so it might be that that explains the difference here. And there’s quite a bit of research showing that after inflation slows down, it takes people a couple of years to really realize that and to get over it.
You saw this in the 80s. You saw in the late 70s, we had this extremely high inflation, then the Fed raised interest rates, which caused some big recessions and brought inflation down. In the early 80s, inflation crashed. Inflation really crashed in ’81, but it wasn’t until ’83 that consumer sentiment started to rise really strongly. It was a couple of years from this time. And it wasn’t until ’84, that consumer sentiment reached a high peak or plateau. And so it takes a while for people to realize that inflation is done.
They get shellshock, they get PTSD, something like that, or they just aren’t paying attention and they don’t even realize inflation’s down until they’ve been to the grocery store 100 times and have been like, “Wow, I haven’t seen prices rise lately. I guess that inflation’s done,” because they’re not paying attention to national statistics or ACON blogs of Wall Street Journal or whatever, CNBC. That’s a possibility.
So number one, end of pandemic benefits. Number two, this natural lag. When inflation goes down, it takes people a while to realize it and get over it.
And then I also think that there’s some political stuff going on where Republicans in particular— we’ve seen the partisan gap increase and Republicans in particular have become intensely negative about the economy, although their sentiment did tick up quite a bit in the latest survey. But overall, the partisan gap has increased a lot since 2020.
Republicans I think have just gotten a lot more negative about the direction of the country since the riots of summer 2020, which they felt were this catastrophe for the nation that ushered in anarchy and meant it was no longer their America and blah, blah, blah.
I think those riots made them feel really dispossessed and grumpy about the direction of the country and their culture. So I think we’ve seen extreme Republican negativity, that goes way beyond Democratic or independent negativity, on the polls.
So I think those are the three things. I think end of pandemic benefits, the fact that it takes time to get over a burst of inflation even after it ends, and the partisan aspect here. That’s my guess.
Jeff: I want to talk about the first two and the way that they’re perhaps related. Because the pandemic benefits in some ways and all the money floating around the system created some of the inflation. The inflation lasted longer than people’s money did so that the money was getting pulled out of the system as people spent it. And it generated this inflation, it generated the rise in prices, and suddenly all those savings were gone, all that pandemic money was gone, and the inflation stuck around for a while.
Noah: That’s right. And so that’s one reason why people got poorer in 2022, or really people got poorer from 2021 through mid-2022. And there was this abrupt— the “poorening” of American society. And it wasn’t just poor people either. This is across the whole spectrum. So when there’s a recession, or there’s this jump in unemployment, that hits a few people very hard, but when you have inflation, it hits everybody.
And this inflation actually hit middle-class people much harder than it hit poor people. Poor people’s wages actually increased quickly, to match or even exceed inflation, even during that bad time. But middle-class people’s wages didn’t, and middle-class people’s wages really crashed and their purchasing power really crashed. And I think you had this middle-class anger, middle-class resentment about the fact that their incomes were going down.
But that’s over now. So I expect that in the next year to two years, we’re going to see an improvement in consumer sentiment.
We won’t necessarily bounce all the way back to super positive, but I think you’re going to see quite a bit of recovery in consumer sentiment over the next year, as long as inflation stays low and wages keep growing and the economy doesn’t experience a burst of unemployment. I think as long as wages keep growing and inflation stays low as it is now, and employment stays high, you’re going to see economic sentiment improve quite a bit over the next year to two years.
Jeff: How much of it has to do with free-floating anger that’s been out there in our politics, and in our view of economics, that goes back to 2008, 2009.
Noah: Well, that anger was extremely intense during the Trump years. Including Trump’s first campaign, I’d say we’d peg that at 2015 through 2019, the pre-pandemic Trump years. But in those years, consumer confidence was extremely high. Consumer sentiment was extremely high, and that matched the economic data. The economic data was good, and consumer sentiment was good.
So the economy was doing well, and people realized it. There was none of this divergence that we see now. People were very mad, and they were angry about politics, and they were yelling all day about Kavanaugh, BLM and Me Too, and Trump and the immigration and all the culture war stuff of the late 2010s. Everyone was yelling, yelling, yelling all the time. And it was this extraordinary era of bad feelings, and a lot of measures about satisfaction with the direction of the country really crashed, but economic satisfaction did not crash at the time.
It stayed very high at the time. So I don’t think that the general partisan division, culture wars, whatever, I don’t think that’s the cause of the low consumer confidence now because it didn’t apply during the late 2010s.
Jeff: Part of it is not that there’s a direct correlation, but that there’s more of a free-floating anger that people have, and they feel more comfortable expressing it in many ways. I mean, it’s part of the polarization that we see in so many areas.
Noah: I agree that that’s a real thing. I just don’t think that that explains the current low consumer confidence because if it did, we’d have seen it show up a lot earlier, not just since 2020.
Jeff: And what is your sense of the next few years as this plays out?
Noah: Well, as long as the economy doesn’t crash or inflation roll back [up], I think we’re going to see a recovery in consumer confidence. I think people are going to decide, “Okay, the bad time’s over, we can go back to feeling good about the economy.” And I think we’re going to see the narratives in the media improve, and I think we’re going to see consumer confidence numbers improve over the next two years, assuming nothing goes wrong.
So that’s my optimistic prediction. And I think that we might see a bit of an economic slowdown from where we are right now, because we’ve been doing so well; but I don’t see it like a big crash. I mean, maybe people never see big crashes coming. It could always happen, right? But as long as it doesn’t happen, I’m pretty optimistic about where consumer sentiment is headed.
That said, I think that the election of 2024 is going to be dangerous to our country, given the fact that Trump is intent on just declaring he wins every election, overturning every election, and then coming back and ruling with an authoritarian iron fist and being a quasi-dictator, or whatever, if he comes back in. That’s all going to be bad. That’s going to be scary and bad.
For the next year or so, we’re in for a feeling of unrest, an unsettled time. After that, if Trump loses, I’m really optimistic that economic confidence will return to something approximating its normal level — as long as Trump loses, meaning that the unrest in society will continue to ebb.
Jeff: I guess the question is, over the next year, with all of this uncertainty and fear that’s there with respect to the political situation that you’re discussing, how the markets respond to that, markets that tend to not like uncertainty and instability.
Noah: Well, nobody likes uncertainty and instability. That’s very consistently unpopular. So I think that a period of stability will be very good for us. It just takes some time. You got to wait.
Jeff: So, the possibility exists that if Trump loses we could have a roaring economy unlike anything we’ve seen in a while?
Noah: Yes.
Jeff: Talk about what you see as— and I know you’re optimistic, but before we wrap it up, do you see anything out there that makes you worry about the underlying economy at this point?
Noah: I’d say a couple of things. I think that high-interest rates, interest rates that stay high for a long time, can hurt some sectors like the commercial property sector. So commercial property is already hurting from the shift to remote work, from the crime wave that affected downtowns across American cities. So yes, there’s been a lot of difficulty in the commercial property sector, but then the commercial property sector also relies on borrowing. They rely on interest rates.
So, basically, the commercial property sector could be in trouble, and this could weaken our banks — because if commercial property developers or whatever go bust, the banks that make loans to them will be weakened. And if they have all these bad loans on their books, they won’t be able to make as many new loans to good applicants, and that could slow down our economy.
So the negative scenario I see is real interest rates persisting for years and, along with some other factors, creating a perfect storm that clobbers the commercial property industry, which in turn causes bank weakness, which in turn causes a rise in unemployment.
Jeff: Well, we’ll hope for the better scenario. Noah Smith, I thank you so very much for spending time with us today.
Noah: Thanks so much for having me on.
Jeff: Thank you. And thank you for listening and joining us here on the WhoWhatWhy Podcast. I hope you join us next week for another Radio WhoWhatWhy Podcast. I’m Jeff Schechtman. If you like this podcast, please feel free to share and help others find it by rating and reviewing it on iTunes. You can also support this podcast and all the work we do by going to whowhatwhy.org/donate.
