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It’s by now conventional wisdom that the economy is pretty good, but most Americans aren’t feeling it. Right on cue, after the release of the most recent numbers, the conventional wisdom reared its head again.
Gross Domestic Product grew last quarter by nearly 5 percent, astounding news given the last two years of worry about the threat of recession. “Blockbuster GDP report shows real GDP grew at an annual rate of 4.9 percent in Q3, blowing even optimistic expectations out of the water,” wrote University of Michigan economist Justin Wolfers. “This economy is going gangbusters, and it's time for the [recession] doomers to apologize for being consistently wrong for two years.”
Indeed, things are much better than we might realize. “The wealth of a typical American household is way up since the pandemic,” wrote Noah Smith. “Inequality is down. Debt-to-income ratios are falling. Racial gaps, education gaps, urban-rural gaps, and age gaps have decreased.”
Despite all this demonstrable good news, “consumers are about as negative about the economy today as they were during stretches of the Great Recession,” the Post’s Catherine Rampell wrote. Indeed, It’s almost enough to despair. “Economy growing, unemployment at record lows, inequality shrinking, crime falling, a domestic manufacturing renaissance underway ... and Biden's approval levels at historic lows,” wrote Volts publisher David Roberts. “Sometimes it's hard not to think we deserve the fascism that's headed our way.”
But the thing is, while most Americans say they are down on the economy, they are feeling the gains of growth, according to Patrick Watson. He’s the senior economic analyst for Mauldin Economics, a newsletter. In an interview with the Editorial Board, Watson said, “lots of survey data says people are feeling it. They mostly feel good about their own situations but also think the country is in terrible shape.”
JS: The economy grew at nearly 5 percent last quarter. That’s huge. The president will say Bidenomics is working. Anything to that?
PW: I think Bidenomics is working, but other things are happening, too. The giant force behind all this is the labor shortage. It's raising wages and giving workers more spending power. Add Biden's fiscal stimulus on top of that and the result is this eye-popping GDP growth.
JS: How does this growth spurt compare to others? Justin Wolfers called it “gangbusters.” I trust he's right, but what I do know?
PW: Here's the data. The preceding four quarters were good but Q3 2023 was roughly twice as good. "Gangbusters" fits.
JS: Why aren't people feeling it? Are costs still too high?
PW: Lots of survey data says people are feeling it. They mostly feel good about their own situations but think the country is in terrible shape. Maybe it’s because of the media always highlighting bad news. Maybe it’s because the one cost of living that's staying stubbornly high is housing. Everyone feels that to some degree. Fortunately, it's starting to break. But inflation and higher interest rates are definitely hurting many folks. That can happen even as the broader economy is doing well. It’s why we need strong safety nets even in good times.
JS: Why is there a labor shortage? And, because the Editorial Board is for normal people, explain why a shortage is pushing high growth.
PW: The labor shortage is demographics aggravated by covid. The boomer generation is now aging out of the workforce, but also living longer, meaning they generate demand for food, housing, etc. Birth rates have been low so there aren't enough younger workers. Covid took people out of the workforce by death or disability. It also changed attitudes, making people less willing to work long hours for low pay.
The law of supply and demand applies to labor. Fewer workers equals higher wages. Higher wages give average people more spending power, which is pushing the GDP growth. Think of it this way: If a business owner puts $1 million profits in his bank account, it doesn't circulate as quickly as if it went to 100 workers via higher wages.
JS: Was talk of a recession overblown then?
PW: These are big changes so I try not to blame people for missing them. The Ukraine war popped up as a big curveball. [It sent energy prices soaring]. Things might be different if, say, Joe Manchin had stopped the infrastructure bill. The pieces just fell into place.
Recession will come but for now we're in a good place economically. I wouldn't expect more crazy good quarters like this one. I think in the future we'll see smaller swings – mild recessions and moderate expansions. But poor policy choices could change this, as could things like social disorder and climate change. Those are my big worries.