The Divergent Perception of the Economy
Despite positive economic indicators, public perception of a downturn contradicts reality. Explore the reasons behind this contradiction and its impact on the economy.
If you ever doubted that the markets and regular folks inhabit two different planets, consider the latest employment report released this past Friday.
The Bureau of Labor Statistics reported that the jobless rate fell back to 3.5% in July, matching the halcyon days in 1969 when men first walked on the moon. Payrolls expanded by 187,000 while hourly wages were up 4.4%, a Goldilocks combination of a not-too-hot or -cold labor market, as economists see it.
At the same time, Bank of America and J.P. Morgan have joined the list of forecasters that have canceled their recession calls for 2023.
But in the latest CNN poll, 51% of respondents said the economy still is in a downturn and getting worse. Even worse for President Joe Biden’s re-election prospects next year, his approval rating for handling the economy was 37%—and that was even lower than his overall approval rating, a dismal 41%. Those numbers were right in line with an array of other polls tracked by RealClearPolitics.
Consumer sentiment as tracked by the University of Michigan has been picking up, hitting 72.6 in the most recent reading, the highest since September 2021. Still, that remains well below the scores that bounced near 100 in the years before the Covid-19 pandemic hit in early 2020.
You’d also think that working Americans would be pleased to have their wages finally rising faster than prices. Average hourly earnings were up 4.4% in the latest 12 months and rose at a 4.9% annual rate in the past three months. Consumer prices were up 3% in the most recent 12 months ended in June, down by more than two-thirds from the four-decade inflation peak hit in 2022.
Market watchers and economists are finding encouragement in the fact that the economy and employment levels continue to expand, even after the Federal Reserve raised interest rates by a substantial 5.25 percentage points and reduced its balance sheet. This positive development has led futures markets to speculate that the Fed is finished with its rate hikes, and may even begin cutting rates as early as next spring.
Following the latest rate hike on July 26, Fed Chairman Jerome Powell indicated that the central bank's next policy meeting on Sept. 19-20 will largely depend on the data available at that time. Now, after a strong job report on Friday, the focus shifts to July's consumer price index (CPI), which is due to be released on Thursday. Economists anticipate a 0.2% increase in both the headline and core (excluding food and energy) measures for the month. However, the year-over-year change in the headline inflation rate could potentially reverse from 3.0% to 3.3%, citing comparison effects from 2022.
It is believed that the inflation picture reflected in June's CPI is likely as good as it will get. On the other hand, the economy continues to perform well. After experiencing a 2.4% annual growth rate in the second quarter, up from 2% in the previous quarter, the Atlanta Fed's GDPNow tracker is predicting a 3.9% growth rate for the third quarter.
Although the solid jobs report provided some relief to the bond market following its recent decline, long-term yields remain near their highest levels of 2022. The reality of a robust economy and inflation above the Fed's 2% target suggests that monetary policy will stay on hold for longer than what the futures market anticipates. This prolonged pause in policy adjustments may bring longer-term Treasury yields closer to the fed-funds rate. Consequently, a potential negative impact on stocks could affect both Wall Street and Main Street.