This doesn’t mean everything is perfect. It rarely is. But many parts of the economy have supply and demand more in balance now than a year or two ago. This is a welcome shift, and it should make it easier to bring inflation down further and avoid a recession.
Americans are starting to feel it. This summer could end up marking the end of the “vibe-cession,” the term that has taken hold to explain why so many Americans give the economy a failing grade despite a half-century low in unemployment. Sentiment is finally improving. The latest University of Michigan consumer sentiment index just notched its largest gain since 2006. Morning Consult shows a steady uptick in sentiment since January. To be clear, both indicators remain well below pre-pandemic levels. But sentiment looks less like it did during the Great Recession and more like early 2010s, a period known for slow growth.
“It may take a while for that kind of re-normalization to work into people’s consciousness,” Jared Bernstein, President Biden’s top economic adviser, told me, “but we’re starting to see some of it now.”
There’s a decent chance sentiment will continue to improve. Both the stock market and gas prices, which play a big role in the economic “vibe,” have improved a lot in the past year, with the popular S&P 500 index up over 17 percent so far this year. Politics also influences people’s views. Republicans rate the economy poorly right now, while Democrats give it high marks. (The reverse was true under President Donald Trump.) But the other factor that has lately become a key gauge is wages adjusted for inflation. In other words, whether a worker’s is pay growing faster or slower than prices are.
Here’s where the story gets interesting. In May and June, the average worker’s pay in the United States finally grew faster than inflation for the first time since early 2021. To put it another way, from April 2021 to April 2023, inflation far surpassed wage increases. People didn’t just feel worse off; there was tangible evidence that they were falling behind. Now the typical worker is better off, even after accounting for inflation, than just before the pandemic. That’s not saying much. If a family has not really been able to get ahead for years, the scars remain.
“We’ve fully recovered employment, but we’re not there yet on household incomes,” Jason Furman, President Barack Obama’s former top economist, told me.
Furman has been pointing out how “real wages” — pay adjusted for inflation — are back above pre-pandemic levels but still way below the pre-pandemic trend. Getting back to trend could take years. Most families are not sitting around making a detailed calculation like Furman’s, but this helps explain why sentiment looks more like 2012 than 2019.
Furman’s analysis is about the middle class. In recent years, the largest pay gains went to workers earning less than $20 an hour. The gains for many of these workers were so great that wage inequality went down. But even though many low-wage workers saw raises that exceeded inflation, their sentiment wasn’t much better than that of the middle class and the rich, since rising prices, especially for rent, hit poor families hard.
It’s becoming clear that Americans really don’t like inflation. It exacts a huge psychological toll — and a tangible one on household budgets. Over the past couple of years, prices went up a lot faster than wages did, at least initially. Now, there’s evidence that pay is starting to outpace inflation. But this will take time to really sink in.
All of this matters a lot for the 2024 election. While the middle class is just starting to come out ahead under Biden, a heavy burden looms with the restart of student loan payments in the fall and the end of pandemic child-care subsidies. The good news is that, despite the gloomy vibe, consumer spending stayed strong. Even though people felt as if they were in a recession, they were spending as if they were in boom times.
The vibe-cession is starting to fade because many Americans finally are beginning to get ahead. Regardless of political party, it’s good for the nation when the middle class thrives.
