Scary economists and bad news

The news cycle has swung back to recession talk, even as inflation is coming down and unemployment is at a 50-year low. Ask people what they've heard about the economy, and they'll tell you it's bad.

Source: Getty Images.

Yesterday at the farmers market, the merchant at a food stand started up a conversation with me after I had paid and was packing up my bag:

Him: Oh, you are one of the scary ones: an economist.

Me: Uh, I try not to be scary. [I was wearing a “Women in Economics” t-shirt.]

Him: I keep hearing that a recession is coming from economists. That’s scary.

Me: Yes, It’s possible. But look around at all the people here today. There’s no recession now. It could last. [Frankly, where I live, is largely immune to recessions.]

I was surprised at the context but not by what he said. The night before, I posted a chart on Substack Notes about the pessimistic news people report in the Michigan Survey. And there it was, in person before me.

The news we hear on the economy is grim.

The Michigan Survey asks two questions about the news:

During the last few months, have you heard of any favorable or unfavorable changes in business conditions?

What did you hear?

On average, 94% of people reported news that was unfavorable from February to early April. (More than one news item per person is possible.) At the same time, the unemployment rate averaged 3.5%—a fifty-year low—and inflation dropped to 5%—4 percentage points below its peak last summer. That’s a big disconnect, and it’s gotten worse.

The negativity bias in the news heard is rising over time. The current level of unfavorable news reported in the survey is about the same as in the double-dip recessions of the early 1980s. At that time, on average, CPI inflation was 10%, and the unemployment rate was 8%.

Ordinary people don’t follow the statistics. For most, Jobs Day is not a once-a-month 8:30 am data ritual; it is a get-up-at-8:30 am and go-to-work daily routine. People live the statistics. They talk with family and friends. They go to the farmers market and see how crowded it is. They turn on the TV, read the newspaper, or stare at their phones. Half the inflation and unemployment rate now relative to the early 1980s should lead to notably more upbeat reports of the news, but it does not. Why?

More bad news than good news is likely due, at least in part, to psychology. Richard Curtin, who ran the Michigan survey for over forty years, argued in his book, Consumer Expectations, that the mismatch is due to how people absorb the news.

Source: Consumer Expectations by Richard Curtin.

But human nature alone can’t explain it since the disconnect has grown over time. Don’t blame this all on one news channel or politics. News reports from Democrats are more favorable than from Independents and Republicans, but unfavorable news dominates for all three groups. And there’s little evidence in the survey (the data are sparse) that the gaps have widened enough to explain the growing disconnect. And don’t blame the media entirely. They give their customers what they want.

The brightest spot now is jobs, but it’s not the news.

If we drill down and look at which specific news people report, the disconnect on labor market news is striking (and disheartening).

Understandably, in recessions, hearing news about high unemployment is much more common than low unemployment. But that’s also true in recoveries and expansions. (The end of the expansion after the Great Recession and early in the recovery from the 1981-82 recession are exceptions.)

For various reasons, people may remember bad news more than good news; however, it’s also the case that the news reports about the labor market are often bad now, despite its objectively great conditions. For example, Fed officials are critical of the booming labor market, saying it’s “extremely tight” and that there are too many job openings and wage growth is too high. They see the current conditions as unsustainable and a factor pushing up inflation.

And then there are the economists who use the Phillips Curve with its simplistic, unstable tradeoff between inflation and unemployment. It turns the good news about the labor market into bad news. And that’s what people hear.

It matters.

The disconnect between the economy and what people are hearing about it is not harmless. When consumers and businesses make decisions, they factor in, among many other things, their perceptions of today and their expectations about the future. How do they form those views? In addition to their own daily experiences, they look to the news. They look to experts, including economists, for advice on the economy.

The endless bad news risks a self-fulfilling spiral. If a recession is coming, I might pull back on my spending or investment. Businesses won’t have many customers, so they lay off some workers. Those unemployed workers spend less. And on and on.

Notably, we haven’t yet seen this dynamic take hold. The level of consumer sentiment has been in recession territory since late 2021, but no recession. It appears that the money in people's pockets and bills to pay is a stronger force than gloomy news about the economy to keep spending. But that gloomy news can endanger the progress in the economic recovery and millions of jobs, especially if consumers like the merchant at the farmers market heed the bad news and cut back dramatically.

Keep it in perspective.

Our economy has been upside down and backward since Covid crashed down on us. But not all the news is bad. It’s essential to maintain balance. See the good too.

Congress swung for the fences to deliver relief in the pandemic and a strong labor market. It worked. So much is at stake now. Here’s me on NPR in July 2022:

The Federal Reserve could put a quick end to inflation on its own, economist Claudia Sahm says, but be careful what you wish for. “I get it, inflation is a hardship. It's the hardship we're living with right now,” she said. “But for many families, a recession is a disaster.”

I talk about the labor market in every interview on inflation and recession. Here’s my post explaining my base case now of a recession:

The Fed will not cut. And there will be a recession starting in the second half …

Nothing is carved in stone. There is a good path too:

Abramowicz: Have you been surprised by how resilient the economic data has been up to this point?

Me: I have been very thankful.

The Fed is trying to get a slow path to get inflation down. No severe recession. That’s where the markets disagree with them. The only way the Fed gets that is if the consumers keep coming back and the jobs remain there. Even if it slows down, we are starting from a position of strength that has never been the case going into one of these cycles.

In closing.

I am not the “scary economist.” though I know several with massive platforms who are. They are often as lopsided in their gloom and doom as the responses in the survey. They may be right; maybe the only cure for inflation is a severe recession. I doubt it. The recession is not inevitable, even if it is becoming more likely.

All policymakers must fight to keep us out of a recession—don’t default on the federal debt and pause the rate hikes. Policymakers other than the Fed must do more to reduce inflation, especially energy, food, and housing prices.

A recession is scary, and it’s harmful. Only spinning out the bad scenarios can make matters worse, even if it sells.