What's Up With the Economy?

Our economy is booming but it doesn't feel that way for many of us

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Some thoughts on the economy from a non-economist

The 19th Century French novelist Flaubert (Madame Bovary), commenting on the theory of a single objective reality, concluded “There is no truth. There is only perception”. As a practical matter, “the truth” exists as a shared perception, and yet it is unquestionable that many people prefer to embrace unfounded beliefs and opinions rather than seek empirical realities. This is especially true of the American public’s sentiments about the current state of our society, manifested in the rejection of science and the proliferation of wild conspiracy theories. An array of current polls indicates many Americans are so dissatisfied with perceived societal problems that the public’s comprehension of many issues is far out of step with observable facts. There is a widespread belief, for example, that the nation’s crime rate is increasing when it is not.¹ And there is a misconception about how much of the federal budget goes to foreign aid: according to various polls, Americans believe the number is about 25% annually; the actual number is less than 1 percent.²

Nowhere is this disconnect between reality and popular perception more apparent than in public reaction to the state of the economy. According to a Harris poll commissioned by The Guardian:

• 55% believe the economy is shrinking, and 56% think the US is experiencing a recession, though the broadest measure of the economy, gross domestic product (GDP), has been growing.

• 49% believe the S&P 500 stock market index is down for the year, though the index went up about 24% in 2023 and is up more than 12% this year.

• 49% believe that unemployment is at a 50-year high, though the unemployment rate has been under 4%, a near 50-year low.

Supply and Demand

When Covid shut down the global economy, the demand for goods and services plummeted. As the advanced economies began to recover in late 2021, demand began to rebound, stimulated by increased government spending, By 2022, this pent-up consumer demand was stymied by the lag in overcoming supply chain disruptions. The result: too much cash chasing too few products- in short, price inflation. On the macroeconomic level, the government’s interventions have been positive, as the growth in GNP proves; on the micro level, not so much.

The reason is that, despite these numbers and the constant reminders that the US is having the best post-pandemic recovery of any advanced economy, average Americans are experiencing higher prices in the market sectors that directly affect them- food, fuel, and housing. Grocery bills are higher and it costs more to fill up your car’s tank. The economy is growing and people are struggling to make ends meet. In a typical household, families find they are spending more for less. And they are not happy about it.

The simple explanation for this incongruity is the delta between macro- and microeconomics, best illustrated by the growth in the financial sector and corporate profits over the past 3 years. The stock market is roaring and lenders are benefitting from higher interest rates imposed by the Federal Reserve Bank to beat back inflation. But at the kitchen table, we see there is a palpable result of conglomeration in the agricultural and grocery sectors given there are fewer but larger entities with outsized market power.³ Prices that increased in the wake of the supply chain issues of 2020 and 2021 never receded as the problems eased. Diminished competition at the retail level means that even as the costs of agricultural products decreased (farm revenues dropped in 2023 after a record 2022⁴), the big grocery chains generally did not cut prices and continued to enjoy record profits. This sort of economic rent-seeking* is sometimes described as “greedflation⁵”

The same phenomenon applies to the cost of fuel. It is boom time for US producers. Business Insider reported that “The surge in US oil production helped big US oil companies post their second-biggest annual profits in a decade, the FT reported.” Nicole Narea of Vox reported that “The US is the largest crude oil producer in the world, pumping out nearly 13 million barrels on average every day in 2023, an all-time record, according to new data from the US Energy Information Administration.” So why aren’t we seeing that reflected in the gas prices at the pump? An obvious reason is that oil is a fungible commodity, and US oil companies often find it more profitable to ship their products to foreign markets.

The other upward pressure on prices is the tight labor market. The unemployment rate is low, the demand for workers is high, and real wages are increasing, These costs are passed on by businesses, of course, but labor’s wage gains have barely surpassed the rate of inflation.

Beyond the tendency of large corporations to engage in opportunistic profiteering, economists point to the externalities that affect markets- wars, natural disasters, pandemics, and political upheaval. After Covid torpedoed the global economy, Russia’s invasion of Ukraine (‘the Breadbasket of Europe”) disrupted the latter’s grain exports as well as the former’s sales of oil and gas. The current Israeli-Hamas war in Gaza led to Yemen’s Houthi rebels launching attacks with missiles and drones on shipping in the Red Sea, one of the world’s busiest trade routes. A consequence is that shipping is being rerouted onto more costly longer routes. Events that might be attributed to a changing climate- wildfires in the west, hurricanes in the east, and tornadoes in the middle of the country- are costing hundreds of billions of dollars per year in financial loss and increased costs in homeowner’s insurance and construction costs.

The Affordability Crisis

In February 2020, just before the onslaught of Covid-19, Annie Lowrey, who writes about economic issues for The Atlantic, published a piece on the struggles many Americans faced in what had been a decade of growth following the great recession of 2008⁶. Just like today’s booming recovery, the average family did not reap the benefits of the growth in the 2010s. She described the situation as a crisis:

But beyond the headline economic numbers, a multifarious and strangely invisible economic crisis metastasized: Let’s call it the Great Affordability Crisis. This crisis involved not just what families earned but the other half of the ledger, too—how they spent their earnings. In one of the best decades the American economy has ever recorded, families were bled dry by landlords, hospital administrators, university bursars, and child-care centers. For millions, a roaring economy felt precarious or downright terrible.

Lowrey identified four areas where rising costs explain why “the spiraling cost of living has become a central facet of American economic life”: housing, health care, student loan debt, and child care. Four years later. during another booming rebound, these factors are still driving up the cost of living for low-, middle- and even some upper-middle-class households.⁷ Housing is in short supply after decades of underproduction, driving up prices. This has been exacerbated by high interest rates, making purchases prohibitive for many buyers. This in turn has put upward pressure on rental costs. And despite the efforts of the Biden Administration, the costs of health care, child care, and elder care have grown at a higher rate than the overall inflation rate. Even actions to alleviate student loan debt have not been fully realized. For these reasons, the exigency Lowrey described four years ago- that two in five American adults would struggle to come up with $400 in an emergency- colors the perception of the overall economy.

Perceptions vary greatly if you are sitting in the corporate boardroom or at the family’s kitchen table. So, it is possible that two things can be true at once, and that, as Rogé Karma writes in The Atlantic, the U.S. economy has reached “Superstar Status”.⁸ Back in February, the same writer tried to explain why “Americans trust feelings more than facts” when it comes to this same economy. ⁹ What is apparent is that the economic issues are complex and not amenable to simple explanations even by the experts whose full-time job is to make sense of them.

*Rent-seeking is the act of increasing one's existing wealth without creating new wealth, in effect gaining monetarily without giving anything in return.

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1. While rates vary from year to year, the trend over the past 30 years has been a dramatic decrease in violent crime nationally.

2. George Ingrham, The Brookings Institution (October 2, 2019)

3. In March, the website Quartz reported on the outsized profits earned by the 3 largest supermarket chains (Kroger, Walmart, and Amazon.)

4. AgricultureDive, December 1, 2023.

5. Irina Ivanova, Fortune (January 20, 2024)

6. Annie Lowrey, The Great Affordability Crisis Breaking America (The Atlantic, February 7, 2020)

7. Annie Lowrey revisited her original article on her husband Ezra Klein’s podcast (The Ezra Klein Show) June 7, 2024. You can listen here or read the transcript here.

8. The Atlantic, June 10, 2024

9. The Atlantic, February 14, 2024