The American economy presents a paradox of contrasting narratives. Traditional indicators, such as consumer spending, retail sales, GDP growth, robust corporate earnings, and a booming stock market, suggest a healthy and resilient economy. Yet, behind this rosy façade lurks a “Vibecession”:

“Vibecession: A period of low consumer sentiment, or ‘bad vibes,’ that occurs even when economic indicators are positive.”— The Motley Fool
17-Jan-24

Despite positive macroeconomic indicators, unease pervades American households, fueled by persistent inflation, high interest rates, and growing financial insecurity. That anxiety is partly due to a long period of dissatisfaction with the U.S. government. According to Gallup, it has been two decades since most Americans said they were satisfied with the nation’s direction:

When a May 2024 New York Times/Siena College poll asked voters what they thought the country’s political and economic system required, the results were overwhelming: 69% said either major changes were needed or the system needed to be torn down entirely.

The following mixed signals lie at the heart of this “economy is good” paradox:

Consumer Indicators

Consumer Spending

Consumer spending is the primary engine of U.S. economic growth. In the first quarter of 2024, personal consumption expenditures (PCE) represented nearly 68% of the nation’s GDP, its most significant component. PCE is the most closely watched consumer spending indicator that sheds light on the state of the American economy.

The U.S. Bureau of Economic Analysis tracks three primary PCE trends: consumer spending (current dollars) and monthly and annual price indices. The annual PCE index also happens to be the Fed’s preferred inflation gauge and is crucial in determining its monetary policy decisions.

The percent change from July one year ago showed that yearly inflation was 2.5%. While that annual figure remains above the Fed’s 2% goal, it is down significantly from a Consumer Price Index peak of 7.7% in October 2022.

In July 2024, PCE or consumer spending rose 0.5%, indicating continued consumer demand. However, while growing PCE suggests consumers are still willing to spend, there are nuances to consider:

• Pent-up demand – The pandemic led to a period of lockdown and restricted spending, creating a surge in demand for goods and services once restrictions eased.
• Government stimulus – The CARES Act, passed on Mar. 27, 2020, injected a total of $2.2 trillion into the U.S. economy. The largest government stimulus package in American history, designed to mitigate the economic impact of the COVID-19 pandemic, injected significant cash into the economy, greatly boosting consumer spending power. Not surprisingly, there was widespread abuse, and people are still being convicted of misusing Paycheck Protection Progam loans.
• Strong job market – The relatively strong job market, with low unemployment rates in many sectors, has increased consumer confidence and disposable income, driving spending.

Here are caveats:

• Inflationary pressures – While consumer spending has been robust, it’s fueled in part by inflated prices. So, while consumers are spending more, they’re getting less in return, creating a sense of strain on household budgets.
• Debt accumulation – Some of the increased consumer spending is fueled by borrowing, leading to higher levels of credit card and other consumer debt (see “Household Debt”). This makes households more vulnerable to economic shocks and future interest rate hikes.
• Shifting consumer behavior – Consumer spending patterns have shifted, with a greater emphasis on goods versus services. This has implications for certain industries and the overall economic outlook.

Automotive Sales

With 75% of the U.S. population having access to their own car, it’s no surprise that the automotive industry is a major economy barometer. In 2023, revenue from U.S. motor vehicle and parts “advanced retail trade” was $1.6 trillion. Automotive retail sales, meanwhile, grew by 5.1% in the first quarter of 2024.

The Business Research Company predicts the motor vehicle and parts dealers market, comprising of merchants that sell automobiles, other motor vehicles, automotive parts, accessories, and tires to ultimate users, will reach $5.3 trillion in 2024, growing at a compound annual rate (CAGR) of 7.9%.

While auto sales have recovered from pandemic supply-chain bottlenecks, high interest rates on auto loans are beginning to dampen demand. The good news for buyers is that used car prices are falling, especially among EVs.

Housing Market

The housing market has experienced seismic changes in the past three years. In 2021, people spent more on real estate than ever before, according to CoreLogic. In March 2022, the Federal Reserve began raising interest rates, which caused the average 30-year mortgage to approach 8% in 2023, after reaching a record low of 2.65% in January 2021. It remains just below 7% today, little changed from where it stood at 2024’s outset.

As a result, home sales have slowed considerably since the peak in 2021. This decline is mainly due to rising interest rates, although high home prices and a lack of inventory have also contributed to the decrease, making mortgages more expensive and reducing affordability for many buyers:

• Existing homes – Existing home sales have slowed significantly. The average number of existing and new homes sold in the past 19 years is 5.2 million and 620,000, respectively. Four million existing homes sold in 2023, 20% below average.
• Inventory – Existing home inventory for sale remains low, leading to a competitive market where homes often sell quickly and above the asking price.
• New homes – New home sales have also slowed considerably since the peak in 2021. The supply of new homes remains tight, further limiting buyer options and contributing to price pressure. Builder confidence has waned as rising costs and slowing demand have put pressure on margins. Some builders are scaling back construction projects or focusing on more affordable housing options. In 2005, the nation’s developers built 1.3 million new homes, nearly twice as many as in 2023, when 670,000 were constructed.
• Price growth – Home prices have continued to rise, though the pace of growth has slowed in recent months. High prices remain a barrier for many potential buyers, particularly those seeking entry-level homes. The median price of a single-family home in June 2024 was $426,900, up 4% from a year earlier, the highest price ever recorded. That is nearly double the 2006 median home price (up 92%), which was approximately $221,900. That was also the last year of the last housing bubble, which burst with disastrous repercussions during the Great Recession of 2007-08.

Retail Sales

Retail sales have maintained strong growth, buoyed by consumer demand for goods and services post-pandemic. Retail sales, which increased by 1% in July 2024, remain strong, demonstrating sustained consumer confidence in purchasing non-essential items. The chart below shows U.S. retail sales are up 42% from $432 billion in March 2020, at the start of the pandemic:

Travel Market

According to the Transportation Security Administration, Memorial Day weekend, the unofficial start of summer, set a single-day record with 2.9 million travelers on Friday, May 24, 2024. That record was broken over the Fourth of July weekend as TSA said it screened just over 3 million people on Sunday, July 7, 2024.

Meanwhile, AAA predicted that 70.9 million travelers would travel 50 miles or more from home over Independence Day week. Of these, 60.6 million people would travel by car, surpassing 2019 when 55.3 million people traveled by car over July 4th.

While travel industry reports suggest the “revenge travel” trend may be over, some indicators say the opposite. In February, a record 22% of Americans intended on holidaying abroad within the next six months, according to The Conference Board. That may explain why such summer hotspots as Barcelona and Santorini have complained about too many tourists. As of July, over 44 million U.S. passengers had departed from American airports on international flights in 2024, up nearly 10% over the previous year.

Business and Finance Indicators

Corporate Profits

Corporate profits decreased by 2.7% in the first quarter of 2024 to $2.73 trillion, up 12% compared to the same period last year. But that snapshot does not tell the whole story. Corporate profits grew slowly and steadily from the 1950s through the 1980s. In the 1990s, they began growing faster but really took off in the 2000s.

The chart below shows full calendar-year corporate profits at two-year intervals from 2000 through 2022, which best illustrates this trajectory:

In a little over two decades, corporate profits have more than quadrupled. By comparison, between 1973 and 2013, hourly compensation for the typical worker only grew 9%, while productivity increased 74%.

Gross Domestic Product (GDP)

GDP grew at an annual rate of 2.8% in the second quarter of 2024. This growth reflects increases in consumer spending, inventory investment, and business investment. In the last three months of 2023, GDP grew even faster than many had anticipated by an annual rate of 3.3%, suggesting that federal policymakers had managed to bring down inflation and secure a “soft landing.”

In June 2024, the World Bank reported that the “impressive” U.S. economy is powering the world, growing faster than any other large advanced economy last year — by a wide margin — and on track to do so again in 2024:

Producer Price Index (PPI)

The Producers Price Index (PPI), which measures prices received by U.S. producers for their goods and services, has moderated after sharp increases in the earlier pandemic years. The PPI for final demand increased by 0.1% in July 2024, with a 2.2% increase over the past 12 months.

This suggests that inflationary pressures on producers are stabilizing, and producers are receiving higher prices for their goods, which signifies economic strength.

Productivity

The Bureau of Labor Statistics reports that labor productivity of American workers in the nonfarm business sector increased by 2.3% in the second quarter of 2024. More output per hour is a positive sign for economic efficiency and helps businesses offset inflationary pressures. Between 1973 and 2013, productivity has increased 74%.

Stock Market

The stock market has performed strongly, with major indices like the S&P 500 and the Nasdaq showing strong year-to-date returns. The Nasdaq Composite Index has reached 17,918.99, and the Dow Jones Industrial Average stood at a record 40,890.47 on Aug. 21, 2024. This is partly driven by technology sector growth and optimism surrounding artificial intelligence (AI) and renewable energy investments.

Red Flags

Consumer Confidence Index

In August 2024, the Consumer Confidence Index rose to 103 from 102 in July (1985=100). In May 2024, the Consumer Confidence Index rose to 102 from 97.5 in April after three consecutive months of decline. It declined again in June to a downwardly revised 97.8 and improved in July to 102.

The Expectations Index, based on consumers’ short-term outlook for income, business, and labor market conditions, improved in August to 83 (1985=100) from 81 in July. This makes August the second consecutive month that the Expectations Index was above 80, the threshold that usually signals a recession ahead.

Consumer Price Index (Inflation)

Inflation in the U.S. has been a significant concern since 2021, driven by a combination of factors, including supply chain disruptions, strong consumer demand, and the government’s stimulus program implemented during the pandemic.

While inflation shows signs of cooling, it remains a major economic challenge, eroding purchasing power, increasing borrowing costs, and putting pressure on businesses and households. The Federal Reserve is actively working to combat inflation through aggressive interest rate hikes, but the full impact of these measures on the economy is yet to be determined.

The Consumer Price Index (CPI) is a vital economic indicator that measures the average change over time in prices paid for a basket of consumer goods and services commonly purchased by urban consumers, including food, housing, transportation, healthcare, education, and entertainment. It is a widely used and influential economic indicator, providing essential information about inflation, consumer spending patterns, and the economy’s overall health.

The Consumer Price Index for all urban consumers was up 3.3% in May and just 3.0% in June. In July, CPI increased 2.9% for the year ending July 2024, the fourth consecutive month of deceleration:

Interest Rates

While the May and June Consumer Price Index measures were higher than the Fed’s 2% inflation target, the Fed acknowledged in July 2024 that it is minding inflation and its full employment goal. Although the Fed has yet to lower rates in 2024, it is expected to do so in September.

While the Federal Reserve’s efforts to combat inflation through aggressive interest rate hikes have resulted in the highest borrowing costs in over a decade, it should be noted that interest rates reached their highest point in October 1981 when they peaked at 18.63%, according to the Freddie Mac.

The Federal Reserve sets the Federal Funds Rate, which effectively controls interest rates. The federal funds rate stands at 5.25% as of mid-2024, driving up the cost of mortgages, auto loans, and other forms of credit. High interest rates have dampened home sales, with mortgage rates hovering near 7%, making homeownership more difficult for many Americans.

Credit Card Debt

American consumers increasingly rely on credit to maintain spending amid rising prices. According to the Federal Reserve Bank of New York, credit card debt surpassed $1 trillion in 2023 for the first time in U.S. history. Credit-card debt set a new record in the second quarter of 2024: $1.14 trillion. The average interest rate on credit card balances has risen to 28%, according to Forbes, which could result in a financial crunch for consumers unable to pay down their balances.

Before the pandemic in November 2019, the average credit card balance per person was $6,194. According to LendingTree, the national average card debt among cardholders with unpaid balances in the fourth quarter of 2023 was $6,864 That includes debt from bank cards and retail credit cards.

Household Debt

Household debt levels, including credit cards and student loans, are at historic highs, leaving consumers vulnerable to economic shocks. The New York Fed’s quarterly Household Debt and Credit Survey (HHDC) shows that total consumer debt is $17.8 trillion as of the second quarter of 2024. That’s a record high. According to Experian, the average total consumer household debt in 2023 was $104,215.

Student Loan Debt

The resumption of student loan payments paused during the pandemic could further strain household budgets. As of July 2024, total student loan debt in the U.S. reached $1.59 trillion. With student loan payments restarting for 40 million Americans in October 2023, economists predict a significant decline in consumer spending, particularly among younger consumers.

Government Debt

The national debt continues to rise, increasing concerns about potential future fiscal challenges. U.S. government debt has soared past $35 trillion as of August 20, 2024, raising broad concerns about fiscal sustainability. In fiscal 2008, at the end of the Great Recession, total debt stood at just $14 trillion. So, in less than two decades, government debt has more than doubled. Rising interest rates increase the cost of servicing this debt, constraining future government spending and necessitating tough decisions on federal budget priorities. As of July 2024, the U.S. government spent $956 billion to maintain the debt, which is 17% of the total federal spending in fiscal year 2024.

Additionally, the recent debt ceiling crisis exposed vulnerabilities in political negotiations, and ongoing budget deficits contribute to a growing national debt burden. The debt ceiling, or debt limit, is a restriction imposed by Congress on the amount of outstanding national debt the federal government can have. The debt ceiling is the amount that the Treasury can borrow to pay the bills that have become due and pay for future investments. Once the debt ceiling is reached, the federal government cannot increase the outstanding debt, losing the ability to pay bills and fund programs and services.

The Rise of Billionaires and Wealth Disparity

While the economy has been experiencing growth, the benefits have not been distributed equitably. One of the most striking aspects of the current economic landscape is the widening disparity between the wealthy elite and the average American. Since the pandemic, the number of billionaires in the U.S. has grown significantly. According to Forbes, American billionaire wealth stood at $8 trillion as of Mar. 18, 2020, just as COVID-19 pandemic was striking. Today, the world’s 2,781 billionaires, a new record, have a combined wealth of $14.2 trillion, nearly double the 2020 figure.

The gap between the wealthy and the rest of the population is widening, with the richest Americans seeing significant wealth gains during the pandemic. This wealth of surge of over $6.2 trillion from 2020 to 2024 would be enough to give every single American, 336,953,873 at last count, a check for $18,400.14. Stock market gains, tech investments, and the growth of major corporations during the pandemic recovery largely drive this rapid wealth accumulation.

While the billionaire class has seen unprecedented wealth growth, income inequality remains a pressing issue. The Economic Policy Institute (EPI) reports that the top 1% of earners in the U.S. now holds more than 23% of the nation’s wealth, compared to just 2.5% for the bottom 50%. Wealth inequality is also stark, with 20% of Americans controlling over 70% of the nation’s wealth.

Greedflation

Greedflationis a term used to describe companies exploiting inflationary conditions to increase their profits by raising prices excessively. This concept gained traction during the COVID-19 pandemic and other global events, where critics argue that corporations took advantage of supply chain disruptions and other economic pressures to boost their bottom lines.

Key points about greedflation:

• Excessive price increases – Companies hike prices beyond what is justified by increased production costs.
• Corporate profits – In March 2024, The Hill reported that “Corporate profits hit a record high of $2.8 trillion as the economy boomed in fourth quarter of 2023.” Studies have shown that a significant portion of recent inflation can be attributed to corporate profit-taking.
• Consumer impact – Consumers bear the brunt of these price increases, leading to higher costs of living.

Greedflation is a hotly debated topic, with some viewing it as a form of price gouging while others see it as a natural response to market conditions. However, as the record corporate profits chart above suggests, the theory may have some validity. And, if some corporations raised their prices legitimately during shortages but have kept them high after those shortages ended, the government is entitled to halt the trend. As The New York Times reports:

“When asked what drives the economy, many Americans have a simple, single answer that comes to mind immediately: “greed.” They believe the rich and powerful have designed the economy to benefit themselves and left others with too little or nothing at all.”— The New York Times
21-Feb-24

A May 22, 2024 Axios/Harris Poll found the same: “72% believe companies are taking advantage of inflation to increase their profit margins rather than being fair and transparent with their prices.”

The truth of the matter is that a different story is unfolding. In the quiet corners of living rooms across the nation, families huddled around kitchen tables, grappling with the relentless bite of inflation, soaring interest rates, and a growing sense of financial uncertainty.

Data Transparency

• Bureau of Economic Analysis (BEA) – Consumer spending or Personal Consumption Expenditures (PCE), Gross Domestic Product (GDP), Motor Vehicle and Parts Dealers, Personal Consumption Expenditures Price Index, and Personal Income.
• Federal Reserve – Consumer Credit, Selected Interest Rates.
• Bureau of Labor Statistics (BLS) – Consumer Price Index; Unemployment, Labor Force Participation, Producer Price Index (PPI), Productivity.
• Census Bureau – Homeownership Rate, Household Income, Poverty, USA Population Estimate, Retail Sales.
• The Conference Board – Consumer Confidence Index.
• Federal Reserve Bank of New York – Credit Card Debt, Federal Funds Rate, Household Debt (incl. Mortgage Balances), Student Loan Debt.
• Forbes – Greedflation, Forbes’ 38th Annual World’s Billionaires List: Facts And Figures 2024.
• Statista – U.S. Motor Vehicle and Parts Retail Trade
• Trading Economics – United States Corporate Profits
• (Department of) Treasury – National Debt.
• The World Bank – Poverty.