America may be on the brink of an epic vibe shift
Stock prices are near records, gas prices are falling, and the Fed is cutting. Will it be enough to lift the sour consumer mood that set in during the pandemic?
Let’s just say it. The mood among American consumers has been pretty sour for about a half a decade.
It’s no mystery why. The period following the arrival of the Covid pandemic in 2020 has been one of the most volatile, destabilizing, and confusing periods of American life since, arguably, the Great Depression.
Since then, even as the economy powered forward, measures of consumer sentiment have often remained mired in territory that would suggest we were still in a recession.
But a few key signals being sent by the markets suggest that we could be about to turn the page on an era of persistently meh-to-bad vibes.
Stock prices touched new highs Wednesday, after the Fed delivered a half-percentage-point cut.
And gasoline prices — one of the more salient price signals available to consumers — have been dropping for pretty much two months straight. If analysts are right, Americans could soon be seeing prices at the pump below $3 a gallon.
From a psychological perspective, these are two of the most important prices in the US economy for determining the mood of consumers—no small thing in a country where consumption is more than two-thirds of the economy.
Research has pretty consistently shown that higher gasoline prices tend to make consumers more pessimistic; higher stock prices, on the other hand, do the opposite. In other words, the current backdrop of falling gas prices and record stock prices should represent rocket fuel for consumer optimism.
But this isn’t just theory. The last time was saw a similar set-up, was back in late 2023 and early 2024, when gasoline prices had tumbled to just above $3 a gallon and stock prices also reclaiming fresh records. The result? America’s economic mood suddenly exploded higher, posting its best two-month improvement since a wave of nationalistic optimism that washed over the country following victory in the first Gulf War in the early 1990s.
Adding the favorable tailwinds for consumers is today’s rate cut from the Federal Reserve, which is widely expected to be followed by more.
That should lower borrowing costs on key purchases like houses and cars, and open up opportunities for refinancing that can put more cash in the pockets of people to spend.
Those households are in good position to spend it because their finances are in remarkably good shape. Levels of household wealth have been driven to records by a great year for stocks and the still high home values. Stock markets have already been pricing in an upsurge of activity, in interest-rate-sensitive industries like residential real estate.
Now, much of that wealth is owned by rich Americans. But the slowdown in inflation over the last couple years has boosted real — that is, inflation-adjusted — income growth for paycheck-to-paycheck workers too. Median household incomes rose 4% in 2023, according to just released Census Bureau numbers. Real income growth has slowed this year, to about 0.5% compared to last year. But it’s still positive, meaning people are better off.
On the other hand, it’s important to note that the upswell of First-Gulf-War-style good vibes at the start of 2024 didn’t last. It melted away rapidly as the stock market stalled out on a couple of bad inflation reports, leaving measures of US consumer confidence back at levels that have prevailed during recessions.
But we are not in a recession! The latest numbers show the economy growing at 3% with the unemployment rate rising — but still at just 4.2%. Still, the skittishness of American consumer confidence is worth considering and seems understandable. The last few years have been, well, a lot.
More than 1.2 million Americans died from Covid. The pandemic disrupted, sometimes permanently, long-standing patterns of work, school, and social and family life. In April 2020, there was a surge of unemployment to the highest level since the Great Depression. Then the federal government flooded the economy with money to keep the lights on. The arrival of vaccines started the country on a stutter-step recovery, made more difficult by the seemingly-never-ending issues with supply chains and supposedly transitory inflation that sorta kinda got out of hand.
Throw into the mix a series of horrible global events like Oct. 7 and Gaza, the Russian attack on Ukraine, as well as the deeply divided American political climate and you’ve got a recipe for a reasonably twitchy populace.
Even so, here we all are. It seems we’ve made it through. And if history is any guide, maybe, just maybe, it could start to feel like it.
