What Do Voters and Investors Know That Economists Don't?
U.S. voters are angry and rebellious, as evidenced by the enthusiasm they've shown so far this primary season for anti-establishment candidates. Investors are frightened, as evidenced by stocks dropping more than 10 percent since early December.
Yet the U.S. economy seems to be doing fine. Gross domestic product appears to still be growing, companies are definitely still hiring, consumer spending is strong. Economists surveyed by Bloomberg this month put the chance of a recession in the next 12 months at just 20 percent.
Here are some possible explanations for this seeming disconnect:
- Voters and investors are ninnies, and everything's actually great.
- Voters and investors are prescient, and the economy's about to go off a cliff.
- Voters and investors aren't necessarily offering a commentary on current U.S. macroeconomic conditions.
I don't know which explanation is right, although I'm pretty confident that it's a mix of No. 3 and one of the others. Last fall I looked at the differing trajectories of Gallup's polls of people's satisfaction with the U.S. and the Conference Board's Consumer Confidence Index since 1990. Consumer confidence reliably followed the business cycle; satisfaction didn't.
This time, let's try looking at satisfaction (which seems like the best measure of voter anger), the economy and the stock market going back to 1979, which is when Gallup started asking people whether they were "satisfied or dissatisfied with the way things are going in the United States at this time." As a simple proxy for the economy, I'll use the unemployment rate. When there's a recession, it goes up. When there isn't, it goes down.
Charting the stock market brings its challenges, because the huge gains of the 1990s make it hard to see what went before. So I've sliced it two ways. First, here's the increase or decrease in the Standard & Poor's 500 Index from one year earlier:
Big surprise: Stocks are volatile! Investors are to some extent trying to predict the future, which is hard. The past three recessions did in fact coincide with big stock market drops, but there were also some sharp drops without recessions, such as in 1987-1988 and 1994. Here's another view, the inflation-adjusted trajectory of the S&P 500.
What stands out here is the contrast between the long 1980s and 1990s boom and what has happened since. Stock prices have jumped around a lot over the past 16 years, but when adjusted for inflation they haven't actually gone up.
Finally, here are the angry voters. Gallup didn't ask its satisfied/dissatisfied question all that often in the 1980s and 1990s, which explains the dotted lines in the chart:
Being satisfied with the country's direction isn't all about the economy. There were big patriotic spikes in 1991, during and after the first Gulf War, and in 2001 after the Sept. 11 attacks. But in the 1980s and 1990s the trajectory seems to have mostly followed the business cycle. Since then, not so much. Satisfaction declined as the economy grew in the 2000s and declined even more with the financial crisis. After spiking briefly in 2009, it hasn't gone much of anywhere since. Why might that be? Well, median household incomes may provide a clue (note that this data only goes back to 1984):
Yes, the median American household is poorer than it was in 1999. Can't really blame people for being dissatisfied about that, can you? In 1980, Ronald Reagan famously asked, "Are you better off than you were four years ago?" Now the question is "Are you better off than you were 16 years ago?"
As for the signals that the stock market is sending right now, they may have more to do with the oil industry's troubles or the economic challenges that U.S. multinationals face overseas than the U.S. economy as a whole. But really, who knows? Economic data tells us what just happened, not what's coming next. And economic forecasters aren't very good at predicting economic turning points.
Oh, and there's another possibility. Conservative commentator James Pethokoukis has a column out today wondering when financial markets will wake up to "the threat of Trump-onomics." Which prompted this observation from fellow conservative commentator David Frum:
I guess that would explain everything, wouldn't it? Voters are rebelling against their declining incomes, and investors are freaking out that the rebellion might succeed.
I feel the need to add this caveat because GDP numbers are subject to big revisions months and even years down the road.
That's the median. The mean forecast was 22 percent.
Yes, yes, the unemployment rate is a flawed, incomplete measure. I would have used the U-6 rate, which includes discouraged workers and involuntary part-timers, but that's only available back to 1994. For showing the ups and downs of the business cycle, though, this should do.
The Manhattan Institute's Scott Winship argues that this data overstates the actual inflation rate faced by U.S. households, and fails to take declining household size into account. But household size stopped declining around 1990, and I don't think better inflation measures would make the 1999 inflection point go away.
This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
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