News Analysis

“It’s the economy, stupid!”

This has been the go-to political refrain for both sides since Democrat strategist James Carville uttered it in 1992 when he advised former President Bill Clinton.

With only days now until the presidential election, polls show that the economy is still a top issue for voters.

After nearly four years since the beginning of the current administration, how has the economic landscape performed?

Inflation Is the Top Issue for Voters

The 12-month view of the Consumer Price Index (CPI) indicates that price stability has been restored amid tighter monetary policy and normalizing supply chains.

A more expansive view of inflation’s cumulative three-year run presents a different picture, however, for households.

The annual inflation rate has slowed to 2.4 percent, the lowest since February 2021. This is considerably down from the June 2022 peak of 9.1 percent, which was the highest in 40 years.

Despite an easing growth rate in the CPI, the post-pandemic inflation bomb reset prices across the marketplace. Cumulatively, headline inflation has soared more than 20 percent over the last few years, though other goods and services have climbed to higher levels.

A whole host of other goods and services have rocketed since January 2021, including gasoline (37 percent), electricity (28 percent), shelter costs (23 percent), and new vehicles (19 percent).

Companies have also endured the brunt of price inflation.

The Producer Price Index (PPI)—a metric of prices paid for goods and services by businesses— has surged approximately 25 percent over the last three-plus years.

Higher prices have harmed household finances, according to one Federal Reserve report.

Inflationary pressures of the last few years have weighed on other important matters related to personal finances.

Various studies have spotlighted just how much inflation has been on Americans’ minds and how inflation anxiety has influenced their views of the country’s economic health.

The higher cost of living has made it harder to make ends meet, so polling numbers have reflected the number of Americans who believe the country is in an economic downturn.

Despite the plethora of recession calls, the U.S. economy has averted one. The third-quarter GDP reading of 2.8 percent represented the sixth consecutive quarter of year-over-year real GDP growth of more than 2.5 percent, the longest streak since 2006.

Some economists call it a “vibecession”—a disparity, in this case, between the actual state of the U.S. economy and the general public’s negative perception of it.

Still, elevated prices have been a chief concern for voters entering the Nov. 5 election. Since the beginning of the primary season, scores of polls have revealed that inflation is the top issue influencing Americans’ vote.

While progress has been made to restore price stability, households should not expect prices to return to pre-crisis levels, says Treasury Secretary Janet Yellen.

Headline employment figures have been solid over the past few years. After recovering all the lost jobs from the pandemic, the U.S. economy has produced about six million new jobs since June 2022.

The unemployment rate was at or below 4 percent for 17 consecutive months.

Digging deeper into the employment data reveals a more mixed labor market.

The first is the divergence between the household and establishment surveys in the monthly Bureau of Labor Statistics jobs report. The former only removes duplication from the data, meaning individuals are only counted once, even if they hold more than one job. The latter counts every position a worker possesses.

Conversely, since June 2022, the household category shows that approximately 3.5 million new jobs were created. In October, the household portion found 368,000 lost jobs.

Another notable trend has been the frequency and size of the downward revisions to the payroll data.

In the first 10 months of 2024, there have been 2.1 million new jobs. However, these figures have been adjusted down by nearly 500,000 (from January to September), meaning almost one-quarter of all reported employment gains this year did not exist.

According to the report, in the 12 months through March, the labor market was thought to have created 2.9 million new jobs, representing a monthly average of 242,000. After the changes, the country added about two million, equaling monthly employment gains of approximately 174,000.

Comparable revisions were made in the 2023 report, which showed 306,000 fewer jobs.

What also has garnered attention is which industries are driving the job gains.

In the last few years, the government has been one of the top job creators, with payrolls increasing by nearly two million, to an all-time high of 23.421 million.

Leisure and hospitality has been another major industry for job creation as employment levels have soared by about four million since January 2021.

Other developments have been observed in the jobs arena. Full-time employment has been trending downward since November 2023, while part-time jobs are higher than before the pandemic. A record 8.6 million individuals are working two or more jobs. The gap in the employment growth rate between U.S.- and foreign-born workers has widened significantly.

“Inflation will keep harming Americans’ finances until their incomes fully recover, but if the job market and economy nosedives, it puts their paychecks at risk of catching up much more slowly, if at all,” said Sarah Foster, an analyst at Bankrate, in the organization’s second annual Wage to Inflation Index report.

Administration officials have stated that wage gains have outpaced various inflation pressures.

“Yes, grocery prices have gone up, but especially recently, wages have gone up more than grocery prices,” Jared Bernstein, the chair of the Council of Economic Advisers, told reporters on Oct. 30. “So, why don’t people feel better? Because they still remember what things used to cost.”

Showing Interest in the Fed’s Rates

The Federal Reserve initially dismissed the inflation threat, calling it “transitory.” After misjudging inflationary pressures throughout the U.S. economy, the central bank started tightening monetary policy in March 2022. The Fed followed through on 11 rate hikes, raising the benchmark federal funds rate to a more than two-decade high of 5.25–5.50 percent.

While the economy appeared to have averted a recession amid rate hikes, the Fed’s pandemic-era rate cuts and post-crisis rate hikes produced challenges in various sectors of the economy.

Home prices have reached record highs as the mortgage lock-in effect reduced housing supply. Many homeowners who purchased residential properties when the 30-year fixed mortgage rate was below 4 percent have refrained from listing their houses for sale. Today, the average 30-year rate is above 6.5 percent, and median sales prices are above $400,000, so current property owners would be paying a lot more than they are now if they moved.

When the central bank raised rates, the monetary authorities made borrowing among businesses and consumers more expensive. It was a one-two punch for market participants: higher prices and higher interest costs.

As credit card interest rates hover at or near record levels—Lending Tree says the average annual percentage rate (APR) on new credit cards is just below 25 percent—it is becoming harder for cardholders to keep up with payments.

Although the United States has moved on from the coronavirus pandemic, the federal government spent nearly $7 trillion in fiscal year 2024. By comparison, the U.S. government spent $4.4 trillion before the public health crisis. At the same time, Washington generated a record $4.92 trillion in revenues.

While net federal outlays as a share of the economy have eased since the pandemic, it is still close to 23 percent of GDP, up from 20 percent in 2019.

One of the culprits behind the rocketing debts and deficits has been interest payments.

Inflation has also exacerbated the nation’s capital’s deteriorating fiscal condition, says the Peter G. Peterson Foundation.

For example, Social Security or Supplemental Security Income recipients have received higher monthly benefit payments over the last few years due to the higher-than-average cost-of-living adjustment (COLA).

Long-term interest rates have been disconnecting from Federal Reserve expectations.

Market watchers have presented diverse theories, but Apollo chief economist Torsten Slok says investors are beginning to worry again about the country’s fiscal health.

“Despite the market still expecting five Fed cuts over the coming 12 months, long rates are moving higher. And despite oil prices falling, long rates are moving higher,” Slok said in a note. “This suggests that long rates are rising because of emerging worries about fiscal sustainability.”

“In the absence of policy measures that can curb these trends and help limit fiscal deficits, deteriorating fiscal strength will increasingly weigh on the U.S. sovereign credit profile,” Moody’s said in November 2023.

Roaring Twenties 2.0

Meanwhile, the U.S. stock market continues notching record highs.

Despite the one-year bear market in 2022, the blue-chip Dow Jones Industrial Average has rallied 40 percent. The tech-heavy Nasdaq Composite Index and the benchmark S&P 500 Index have soared 47 percent and 57 percent, respectively.

However, after adjusting for inflation, cumulative gains have been lower. The inflation-adjusted S&P 500 returns over the last three years were 8 percent. Three-year returns in the Dow Jones and Nasdaq have been about 6 percent.

“Stocks have done so well this year that it’s fair to say market participants haven’t feared much,” said Jeffrey Roach, the chief economist at LPL Financial, in a note.

Market watchers have alluded to various developments that suggest more gains are ahead.

Fed policy expectations are one reason behind the persistent gains. Interest rates are beginning to fall, though the Fed may not be cutting as aggressively as the financial markets hoped before the new easing cycle began.

Solid economic data is another contributor to the record rally.

Although it might be a Dickensesque situation for consumers—it is the best of times and the worst of times—consumption, which drives two-thirds of economic growth, has shown little signs of slowing down.

Real (inflation-adjusted) consumer spending surged 3.7 percent in the third quarter, up from 2.8 percent, according to the Bureau of Economic Analysis. Moreover, September retail sales beat market expectations, rising 0.4 percent, up from the paltry 0.1 percent boost in August.

“Consumers continue to drive spending, buttressed by strong fundamentals and a healthy labor market,” said BNP Paribas economists in a recent note.

“In aggregate, households look to be in a better financial position relative to the last two recessions, with the labor market continuing to post healthy gains.”

Looking ahead, Wall Street is anticipating more gains over the next 12 months, according to Bankrate’s Third-Quarter Market Mavens Say.

Respondents believe the S&P 500 will surge to 5,975 by next year’s third quarter.

“Reflecting multiple sources of uncertainty, there are some reasons to be cautious about the outlook,” said Mark Hamrick, Bankrate’s senior economic analyst. “Even so, the resilience of the U.S. economy and the stock market’s ability to power through multiple threats taken together have been nothing short of remarkable.”

The ‘Vibecession’

As mentioned, economists have described the current climate as a “vibecession,” the disconnect between the public’s skepticism about the economy and the data. In other words, it is about how the economy makes the people feel. Regardless of the statistics and in light of the consumer surveys, the American people are unhappy about the state of the world’s largest economy.