- Recent economic data has been encouraging, but Americans still feel bad about the recovery.
- The ‘vibecession’ comes from weakening worker power, high inflation, and falling real wages.
- If it persists, the bad mood could slow spending and drag the economy into an actual slump.
The economic recovery from the coronavirus recession was among the fastest in modern history.
It’s also been one of the weirdest. Americans are feeling dismal about the state of the economy, citing soaring prices and slowing economic growth. Yet the indicators used to track economic health for decades are flashing signs of undeniable strength. July saw the US hit record-high employment, inflation start to cool, and wages continue to climb at a faster-than-usual pace.
The zeitgeist already has a name to fit its bizarre nature: a “vibecession.” Kyla Scanlon, a markets and economics blogger, coined the term in a June 30 Substack post, highlighting how rising prices are creating bad vibes that overshadow generally strong economic data. A healthy jobs report doesn’t mean much to a worker if their wallet is getting lighter by the day.
This isn’t how economic recoveries usually go. The rebounds from the 2001 and 2008 recessions saw the labor market slowly heal while inflation hovered around 2%. The opposite is happening today. Employment healed at the fastest pace in decades, but inflation sits near four-decade highs. The country is also grappling with an unusually persistent labor shortage as childcare pressures and virus concerns keep workers on the sidelines. Put simply, the US is in uncharted economic waters.
There’s also immense uncertainty around when inflation will improve and how quickly, and whether that cooldown requires a recession and widespread job loss. The path forward is murky for the most experienced economists, let alone the average American, and that’s adding to the bad vibes, Scanlon said.
“The only certainty is uncertainty, the only conviction is the lack thereof, and the only path forward is with a blindfold,” Scanlon wrote.
The US isn’t in a recession, according to the National Bureau of Economic Research, the group of economists that decides when downturns start and end. But Americans’ bad vibes point to serious problems emerging in the recovery.
The ‘wedge’ protecting Americans from inflation is crumbling
Americans feel bad about the economy, but their finances are still holding up relatively well. Real disposable personal income — the cash Americans can spend after inflation and taxes — is still around the levels seen just before the pandemic hit. Despite soaring prices and falling real wages, the average household still has roughly the same financial strength it enjoyed in early 2020.
That’s unlikely to last, though. The gauge has been on a downward trend since last summer, dragged lower by accelerating inflation and dwindling stimulus. The cushion that had been protecting Americans from soaring prices is now on its last legs.
Positive disposable income created a “historically quite rare” wedge between inflation and spending that’s kept the recovery chugging along, Arend Kapteyn, the global head of economics and strategy research at UBS Investment Bank, said in a July 20 call with reporters. But that gap won’t be around forever.
“It probably starts to dissipate over the next few quarters, and then the two are going to converge,” Kapteyn said, adding that “it’s a bit of a race against the clock” to bring inflation down before household finances deteriorate further.
Job openings are everywhere, but worker power is fading
The Biden administration, the Federal Reserve, and countless economists have highlighted the labor market’s rapid recovery as a sign that the economy is far from a recession. A closer look at the hiring backdrop, however, reveals many more reasons Americans are feeling glum.
For one, job seekers aren’t enjoying the same demand they saw in 2021. Companies that previously had little problem attracting job applicants started offering signing bonuses, complimentary food, and even free iPhones to bring in new hires.
Those perks are gone now. Slowing economic growth and rising interest rates have hit the brakes on many firms’ hiring plans, erasing the benefits that came with a labor-demand-heavy economy.
Those who’ve been working through the pandemic are losing out in their own way. While inflation eased up through July, wage growth is still far from keeping pace with rising prices. Real average hourly earnings reached $32.27 last month, down from the February 2020 high of $32.56.
“Consumers are feeling really good about the job market, in that they can find jobs, but they’re not feeling good about inflation that’s outpacing their income growth,” Brett Ryan, a senior US economist at Deutsche Bank, told Insider. “It’s like, ‘I have a job, but I’m sprinting just to stay in place.'”
The labor shortage that powered wages higher is fading, too. Job openings fell to 10.7 million from 11.3 million in June, marking the largest one-month decline since the recovery began. Workers are quitting at a slower pace as well, suggesting the hiring backdrop isn’t as appealing as in recent months.
“A slowdown in the labor market is likely going to take a rise in unemployment, and that’s precipitated by rising interest rates,” Ryan said. “I think it’s very much the case that this mood is likely to persist for some time.”
Americans’ bad vibes endanger the still-fragile economy
There wouldn’t be much to worry about if Americans’ bad vibes were just feelings. But persistently weak sentiment can slam the brakes on the recovery.
The thesis goes like this: Consumer spending counts for roughly 70% of overall activity — key fuel for the economy as it heals from the pandemic recession. Spending has held strong through 2022, but as real disposable income continues to fall, Americans will feel more pressure to cut back on shopping to preserve their savings.
If inflation cools quickly and wages continue to climb at a strong pace, disposable income can rebound and spending can hold steady, UBS’s Kapteyn said. Should inflation stay elevated, spending could crash into negative disposable income. Americans would sharply pull back on spending and the US could plunge into a consumer-led recession, the economist said.
Weakness in the labor market — and its effects on Americans’ moods — could also spark a downturn, according to Ryan. It “usually takes a shock” to slow households’ spending, and a “greater deterioration in the labor market” can be enough to worsen Americans’ moods and “turn the sentiment into reality,” he said.
The July inflation report signals the US is on the right track, but if price growth doesn’t cool fast, Americans’ bad vibes could soon become a major threat to the still-incomplete recovery.