Why the Economy Feels So Bad

Felt inflation, diverging income distribution, and competition for jobs and resources give a feeling to many consumers that things are not the way they are supposed to be.

A Tale of Two Economies

It seems every week a new report comes out claiming a recession in the USA, followed by a report saying the opposite. Similarly, the “decoupling” of the world’s economies keeps making the news. Some say European will probably and Asian economies certainly will go down, too, whereas others predict a decoupling of growth. The public becomes increasingly pessimistic about the future outlook, as dropping consumer sentiment measures across the industrialized world show. Optimistic pundits are getting increasingly exasperated at the seeming disconnect between what their numbers show and the gloomy feelings pervading the common people.

For instance, Brian Wesbury, chief economist at First Trust Advisors, points to all the good news. In an interview on Nightly Business Report he rejects the idea that the USA will go into a recession: 2007 U.S. growth 3% (4% excluding the housing sector), total sales including all of the new stores growing strongly, unemployment rate still at 5%, incomes up.

On The NewsHour with Jim Lehrer (PBS) Stephen Moore, senior economics writer for the Wall Street Journal, defends the good news against Daniel Gross, financial columnist for Slate and Newsweek magazine: a six-year economic expansion, steady job growth, very low unemployment. Nevertheless, Americans have been nervous about the future for over a year.

One Number for All

For starters it is difficult to express in a handful of numbers the experience of 60 million Britons, 65 million French, 82 million Germans, and much less 300 million Americans or 320 million inhabitants of the Eurozone. As Wesbury points out, the Midwest is not like New York City. The real estate market in Berlin, Germany, is not like the one in Paris, France. Certainly, a Consumer Price Index for the USA cannot reflect the many different lives from students to pensioners. A large economy also consists of many numbers. The American “Index of Leading Indicators,” for example, has 10 components. For every good number someone can quote a bad number. Daniel Gross points to the weak jobs report, the contracting manufacturing sector, rising inflation, and high energy prices.

Growing Disparity

The differences in experience show in one particular area in both the USA and Europe. The median incomes barely moved, but incomes at the very high end ran up tremendously. Corporate officers had large pay raises and now make over a hundred times more than their average employee. The radical wage demands of many European trade unions speak to the discontent. But it goes beyond the top. Tobin Smith of ChangeWave Investor justifies the continued strength in consumer spending with the “super-spenders,” the top 20% of earners who account for 40% of U.S. consumption. They saw their income growing at a 5% rate a year. The other 80% did not do as well and consequently feel left behind. Even workers are growing apart, though. The rapidly transforming economies require new skills that leave out many people without the proper education, while even young university graduates can score high paying jobs.