The “vibecession” that has confounded economists for the past two years is finally behind us.
Recent shifts in the economic data, financial markets and consumer confidence signal an end to what my Bloomberg Opinion colleague Kyla Scanlon identified in mid-2022 as a “vibe decline” or “vibecession” that was immune to the apparent resilience of the economy. I made my own effort a little later to talk about why consumers were feeling so lousy despite a boom in jobs growth, focusing on stagnating wages and high inflation. With another 16 months of perspective, it’s clear that those weren’t the only factors. Fortunately, all the main culprits are now trending in the right direction.
The first and most discussed is inflation. I’ll use the headline Consumer Price Index since it encompasses the things consumers are most emotionally sensitive to, even if that’s not the measure the Federal Reserve uses to set monetary policy.
Food and energy prices are arguably the factors that politicians and the media emphasize most — ignoring their notorious volatility — because those costs hit households immediately. Since peak “vibecession” in June 2022, headline gains in CPI have fallen to 3.1% from 9.1%.
Food inflation is now back near 3%, year over year, after peaking at around 11% last year. The drop in the price of gasoline, which makes up 3.4% of the index, has been a major contributor to slowing headline inflation. Retail gasoline has fallen by almost 40% since June 2022, helped by record domestic oil production. The US is now pumping 1.3 million more barrels of oil per day than it did about 18 months back.
Easing pressure at the pump means paychecks go farther now than they did in the recent past. When the vibes were at their worst, inflation-adjusted average hourly earnings had returned to their early 2019 levels. That feeling of going backward at a time when pandemic-era fiscal support programs were also expiring understandably made consumers feel poorer. Wage growth has since then overtaken inflation thanks, in part, to the resilience of the labor market. Inflation-adjusted earnings are now rising at about the same rate as they were in the 2010s, with buying power higher than at any pre-pandemic point.
Ordinarily, wages rising faster than the price of goods is bad news for companies because labor costs start to eat away at profit margins. That often leads to job cuts and sometimes to recession. Fortunately, productivity gains from a normalization in supply chains over the past two quarters have allowed real wages to rise without denting company profits — the kind of utopian conditions the economy had during the late 1990s.
The almost miraculous surge in productivity, particularly in the third quarter, is what allowed real gross domestic product to grow strongly alongside a rapid cooling in inflation. That, in turn, has led the Fed to acknowledge it’s done raising interest rates, with markets now anticipating a significant amount of monetary policy easing in 2024.
Whether those rate cuts materialize remains to be seen, but the impact on the borrowing costs that consumers care about — think car loans and mortgages — has been immediate. This is arguably the single biggest contributor to the vibe shift in recent weeks. On top of that, an S&P 500 Index flirting with all-time highs has given retirement accounts a significant boost.
Put it all together and it’s no wonder people are feeling better about their prospects. A recent indication of this was the University of Michigan’s consumer sentiment index, which jumped by the most since 2005 in December. Gains in sentiment were seen across all age, income, education, geographic, and political identification groups. In a similar vein, a daily tracker on the direction of the US economy from polling firm Civiqs has increased steadily since late October and is now at its highest level in more than two years.
The disruptions of the pandemic severed the link between consumer sentiment and the economic numbers. Soaring inflation piled onto the trauma of Covid-19, leaving people feeling exhausted and frustrated no matter what the data said about jobs or household wealth. Now that the metrics people care about are improving, we can expect confidence to more closely track the economy in the ways economists expect — making the “vibecession” one final pandemic-era disruption we can put behind us.
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