For months, economists have wrestled with the disconnect between how well the economy is doing and how badly people feel about their financial standing.
Now, evidence suggests that the so-called “vibecession,” or that prolonged period of negative sentiment about the economy, appears to be ending, according to Michael Pearce, deputy chief U.S. economist at Oxford Economics.
As inflation cools and the Federal Reserve prepares to lower interest rates, Americans’ assessments of the future are improving, which is bringing the country’s economic standing more in line with consumer sentiment, Pearce wrote in a report published Friday.
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Other economists also note a recent glass-half-full outlook.
“Consumer confidence seems to be catching up with where the economy is,” said Brett House, economics professor at Columbia Business School. “They are kind of meeting in the middle.”
However, it is difficult to pinpoint what is causing the shift in mood, Pearce wrote in his report.
“Our leading candidates would be a lagged response to the news that inflation is falling back and appears to be on a sustained trend back to 2%,” Pearce wrote. ”It could also reflect increased optimism for the future now that the Fed is on a clear path to lowering interest rates.”
Setting the stage for the Fed to cut rates
Recent economic data has paved the way for the central bank to lower its benchmark rate for the first time in years.
The personal consumption expenditures price index — the Fed’s preferred inflation gauge — showed a rise of 2.5% year over year in July. And, though the unemployment rate is still low at 4.2%, it has been trending higher over the past year.
“All signs point to continued progress on inflation, with pressures expected to ease further with the release of the August consumer price index on Wednesday,” said Greg McBride, chief financial analyst at Bankrate.com.
“Other measures of inflation — the personal consumption expenditures index and unit labor costs — have been telling the same story and have set the table for the Federal Reserve to begin cutting interest rates this month,” he explained.
Markets are now pricing in a 100% probability that the Fed will start cutting rates when it meets Sept. 17-18, with the potential for more aggressive moves later in the year, according to the CME Group’s FedWatch measure.
‘Nailing a long-awaited soft landing’
Meanwhile, consumer spending has held up even better than expected, according to the most recent reading.
“The American consumer has been resilient,” Jack Kleinhenz, chief economist at the National Retail Federation, said in the September issue of NRF’s Monthly Economic Review, released Friday
Despite earlier expectations of a recession, the U.S. has dodged a downturn, according to Kleinhenz.
“The U.S. economy is clearly not in a recession nor is it likely to head into a recession in the home stretch of 2024,” Kleinhenz said. “Instead, it appears that the economy is on the cusp of nailing a long-awaited soft landing with a simultaneous cooling of growth and inflation.”
Progress on inflation without a sizeable deterioration in the labor market has created a “classic ‘Goldilocks’ scenario,” Columbia’s House said.
Although as CNBC’s Bob Pisani recently put it, there is still a group of “recessionistas” who have been insisting there is a serious slowdown coming. And yet, fewer economists now see that happening in the near term. Goldman Sachs recently slashed the probability of an economic downturn from 25% to 20%, shortly after raising it from 15%.
“That bandwagon was very crowded in 2023, and for good reason, but the odds of a soft landing have continued to grow over the last 12 months,” McBride said.
Officially, the National Bureau of Economic Research defines a recession as “a significant decline in economic activity that is spread across the economy and lasts more than a few months.” The last time that happened was early in 2020, when the economy came to an abrupt halt.
In the last century, there have been more than a dozen recessions, some lasting as long as a year and a half.
‘Recessionistas will eventually be right’
“The problem with the recessionistas is, of course, they will always at some point be right,” House said. “It’s certainly the case, at some point in the future, the U.S. economy will dip into a recession.”
Since the fall of the Berlin Wall, some kind of economic disruption or correction has happened with pretty predictable regularity, according to House. Now there is the added uncertainty of an upcoming U.S. presidential election and the prospect of significant policy shifts.
“The recessionistas will eventually be right,” House said, but “there is no victory if it comes in a few years.”