For a while now, economists have been puzzled by the disconnect between the strong performance of the economy and the negative feelings that people have about their financial situations. However, recent evidence indicates that the “vibecession,” or the prolonged period of pessimistic sentiment regarding the economy, may finally be coming to an end. According to Michael Pearce, the deputy chief U.S. economist at Oxford Economics, as inflation starts to cool down and the Federal Reserve plans to reduce interest rates, Americans’ outlook on the future is becoming more optimistic. This shift in consumer sentiment is aligning the country’s economic condition more closely with public perception, as highlighted in a report published by Pearce.
Although there is a renewed sense of optimism in consumer sentiment, it is challenging to pinpoint precisely what is driving this change of mood. Pearce mentioned in his report that possible reasons for this shift could be the recent news of decreasing inflation rates, which seem to be heading back to a stable 2%. Another factor that might be contributing to the positive outlook is the expectation for lower interest rates with the Federal Reserve’s clear intention to embark on a path of rate cuts.
Recent economic data has laid the groundwork for the central bank to initiate its first rate cut in years. The personal consumption expenditures price index, which is the Fed’s preferred measure of inflation, showed a year-over-year increase of 2.5% in July. Despite the unemployment rate holding steady at a low 4.2%, it has shown an upward trend over the past year. Experts like Greg McBride, the chief financial analyst at Bankrate.com, anticipate further progress in inflation dynamics with the anticipated release of the August consumer price index. Markets are now pricing in a 100% likelihood of the Fed starting rate cuts during its meeting in September, with potential additional actions later in the year, according to the CME Group’s FedWatch measure.
Consumer spending has displayed resilience beyond expectations, as outlined in the most recent economic review. Jack Kleinhenz, the chief economist at the National Retail Federation, expressed that the American consumer has proven to be robust despite earlier concerns about an imminent recession. Kleinhenz is optimistic about the U.S. economy’s prospects, highlighting the avoidance of a recession and the likelihood of a soft landing with a simultaneous cooling of growth and inflation in the near future.
Brett House, an economics professor at Columbia Business School, indicated that consumer confidence is finally catching up to the economy’s actual performance, creating a better balance between the two. Although there are still skeptics who predict a significant economic slowdown, the number of economists foreseeing an impending recession has decreased significantly. Goldman Sachs, for example, has lowered the probability of an economic downturn and is increasingly optimistic about a soft landing scenario. McBride emphasized that despite the persistent concerns of a recession, the odds of a mild economic adjustment have been on the rise over the past year.
House pointed out that economic disruptions or corrections have occurred relatively predictably since the fall of the Berlin Wall. The upcoming U.S. presidential election and potential policy changes add to the uncertainty of the economic landscape moving forward. While it is unlikely to entirely eliminate fears of a future recession, the current positive trends and conducive conditions offer hope for a stable and growing economy.
Overall, the recent upturn in Americans’ sentiments regarding the economy signals a potentially brighter and more optimistic economic trajectory, marking the possible end of the prolonged “vibecession.”