Vibecession

Vibecession

Of all the factors that determine the outcome of modern elections the performance of the economy is probably the most important. As James Carville, Bill Clinton’s campaign adviser, put it in the 1992 presidential election, “It’s the economy, stupid”. Carville’s relentless focus during the campaign on the lingering effects of the 1991 recession helped Clinton to victory, ending 12 years of Republican control of the White House.

• If economic performance wins elections the Democrats should be heading for another four years of government in November’s presidential election. The US economy has exceeded expectations, not only defying widespread predictions that it would fall into recession, but growing far faster than any G7 group of industrial countries and creating 16m jobs since the last election. Unemployment is well below its long-term average, inflation is running at just 2.5% and the stock market (S&P) is up 19% on the year.
• Economists have been wowed by this performance. US voters haven’t. The US economy has had two years of strong growth but, according to a Gallup survey in August, 63% of Americans think the economic situation is getting worse. In May, a poll conducted by market research group The Harris Poll found that 55% of Americans believed that the economy was shrinking and 49% thought unemployment was at a 50-year high.

• What appears obvious to economists is anything but for many Americans. US blogger Kyla Scanlon coined the term ‘vibecession’ – a compound of vibe and recession – to describe the disconnect between economic fundamentals and people’s perceptions of the economy.

• Politics helps explain some of the gaps. Research by the University of Michigan shows that Republicans are much more pessimistic about the economy today than Democrats.
   
• The research finds that having your favoured party hold the White House makes you markedly more positive on the economy. When Mr Biden took office in 2021 consumer sentiment perked up among Democrats and went down among Republicans. This pattern, of sentiment shifting within the electorate according to who is in the White House, has repeated at every election since at least the late 1990s.

• But this is not the whole story. The huge upswing in US inflation in the last few years continues to weigh heavy on the American mind. Polling by Gallup finds that Americans still rate inflation and the cost of living as one of the top issues facing the country despite falling headline inflation.

• This illustrates another divide between economists and voters. Economists tend to focus on rates of change, inflation, incomes and so on. Consumers care at least as much about levels.

• Since 2020 US energy prices have risen by 27%, food prices by 26%, rents 25% and the cost of petrol 24%. Voters going to the polls on 5 November have lived through the most sustained period of high inflation in 40 years. People loathe inflation, particularly in things they buy frequently, such as groceries or petrol. Rightly or wrongly, people tend to see inflation as the government’s fault whereas, according to Harvard economist Stefanie Stancheva, they attribute wage rises to their own performance in their job or career progression.

• So while wages are currently growing faster than inflation, many US voters aren’t giving the government the credit. Moreover, for all the recent improvements in spending power driven by the recovery and falling inflation, median real wages and household incomes are still lower than they were at the time of the last US election.

• None of this is to say that, collectively, Americans are not spending. Unlike Britain, where consumer spending has lagged the recovery in growth, US consumption has grown in line with GDP. Part of this reflects the rapid growth in the size of the workforce and the population. But there is also the question of which Americans are spending. Overall consumer spending reflects income levels that are heavily skewed to towards the top of the earnings distribution. Higher-income households are the big spenders.

• Lower-income households have been hardest hit by the inflation of recent years. Such households spend a larger share of their incomes on food, fuel and rents, categories where prices have risen more rapidly than overall prices in recent years. In January 2023, with inflation at 6.4%, 65% of Americans in the lowest decile of the income distribution expressed themselves “very stressed” by inflation, a figure that fell to 17% for the highest income decile.

• There’s a long-term trend at work here too. Looking beyond the ups and the downs of inflation and incomes we seem to be living in a more pessimistic age. A recent US study analysed about one billion local newspaper reports over the last 200 years to construct an index of economic sentiment. The authors found that sentiment, as expressed in the news, is now more negative than in most of the late 19th or 20th century and, remarkably, lower even than during the great depression.

• A similar analysis by the Financial Times journalist John Burn-Murdoch reaches much the same conclusion. Burn-Murdoch used Google Ngram Viewer to search for selected words in English, French and German books from 1500 to the present. He found that: “The frequency of terms related to progress, improvement and the future has dropped by about 25% since the 1960s, while those related to threats, risks and worries have become several times more common.”

• Leaving such long-term trends to one side, how people feel about the economy is shaped more by their daily experiences of filling up their car or buying groceries than by the movements in high-level economic data. It is a lesson data-hungry economists should take to heart.

OUR REVIEW OF LAST WEEK’S NEWS
The UK FTSE 100 equity index ended the week up 1.1% at 8,273 in a strong week for global markets as expectations grew that the US Fed may cut rates by half a percentage point when it meets this week

Economics

• US consumer price inflation eased to 2.5% in the 12 months to August, strengthening expectations that the Fed may cut interest rates by as much as 0.5 percentage points at their meeting on Wednesday
• The Fed more than halved a proposed increase in the amount of capital that the largest US banks are required to hold, following concerns it would damage US banking competitiveness
• The Bank of England has also watered down plans to raise capital thresholds for UK banks and delayed their implementation to 2026
• The UK economy posted a second month of flat GDP growth in July, suggesting that the momentum of UK growth slowed into the third quarter
• UK wage growth continued to slow to 5.1% in the three months to July. Job vacancy numbers also fell in July, in line with a picture of gradual deceleration in the labour market
• The Royal Institution of Chartered Surveyors reported UK housing demand and sales activity increased in August as mortgage interest rates eased
• Chancellor Rachel Reeves stated “difficult decisions on tax, spending, and on welfare” should be expected in next month’s UK budget
• The UK’s Office for Budget Responsibility warned that, based on March 2024 policy settings, the UK’s public debt is on an “unsustainable path” over the next 50 years due to an ageing population, climate change and rising geopolitical tensions
• The UK’s Low Pay Commission estimates that the National Living Wage would need to increase by 5.8% to £12.10 an hour next April to remain at two-thirds of median earnings. It will make a formal recommendation to the government in October
• The UK government passed a bill to restrict winter fuel payments for approximately 10m pensioners in England and Wales, saving £1.4bn in 2024-25.
• The European Central Bank cut interest rates by 0.25 percentage points to 3.5%, the second cut in three months
• Industrial production in the euro area fell in July, highlighting the fragility of the region’s recovery
• The EU is evaluating ways to refinance €350bn of COVID-era borrowing amid looming repayments and reluctance of member states to contribute more funds, the FT reports
• The European Commission released a report authored by former head of the ECB Mario Draghi on how the EU can raise its trend growth rate. The report calls for increased investment, liberalisation and integration
• Chinese imports grew less than expected, adding to fears of slowing domestic demand
• The oil price reached the lowest level in more than two and a half years
• Head of the International Energy Agency, Fatih Birol, said that “given the current weak demand and lots of oil coming from the non-OPEC countries, mainly from America and others, we may well see downward pressure on the [oil] price”

Business

• The European Court of Justice ruled that Apple must pay a €13bn tax bill to Irish authorities after a 2016 court ruling of ‘unlawful aid’ was upheld
• Heathrow Airport registered record passenger numbers over the summer, with their busiest-ever day recorded in August. Manchester and Stansted airports reported similar passenger records
• The UK’s Competition and Markets Authority expressed concerns over the proposed merger between mobile networks Vodafone and Three UK and will now examine remedies
• Gold mining company AngloGold Ashanti agreed to a £1.9bn purchase of London-listed rival Centamin
• Italian bank UniCredit announced it holds a 9% stake in German bank Commerzbank, sparking rumours of a takeover bid, according to the FT
• Property listing company Rightmove rejected a £5.6bn bid from the Australian REA Group, saying the bid was “wholly opportunistic and fundamentally undervalued”
• Significant share price gains in artificial intelligence-related companies are hiding weaker performance across the wider technology sector, according to an analysis by the FT
• Rating agency Fitch further downgraded property company Canary Wharf Group’s credit rating to “highly speculative” amid refinancing risks
• Amazon Web Services announced an £8bn investment in UK data centres over five years
• Revenues for UK television production companies fell £392m in 2023 amid declining advertising incomes
• Losses at UK retailer John Lewis Partnership almost halved in the six months to July to £30m, compared with £59m last year
• A “new and improved deal” has been agreed between the UK government and steelmaker Tata, including a £500m grant contributing to a new electric arc furnace. Approximately 2,500 jobs will still be lost at the Port Talbot site due to closure of the existing furnaces
• A proposed bill on renter’s rights was introduced by the UK government that included outlawing ‘no fault’ evictions
• The Wall Street Journal reported that US freight trains are getting longer, with some almost four miles long

Global and political developments

* Former president Donald Trump is safe as the FBI investigates what could have been an assassination attempt against him in Florida

* Snap polls showed that most voters saw vice-president Kamala Harris as the victor in the TV debate last week with former US president Donald Trump

* Donald Trump ruled out another presidential debate against Kamala Harris

* The Mexican Senate approved controversial judicial reforms amid widespread protests and concern among foreign investors

* The UK will require a £10 travel permit on visiting citizens from more than 40 countries in 2025, including the US and EU

* UK foreign secretary David Lammy and US secretary of state Antony Blinken travelled to meet president Volodymyr Zelensky in Ukraine to discuss using long-range missiles to strike further into Russian territory

* Russian president Vladimir Putin said that Moscow would see the use of these long-range missiles as “direct participation” of NATO countries

* Conservative MP Mel Stride was eliminated in the second round of the Conservative Party leadership contest; Robert Jenrick again topped the poll of MPs

* Tensions are rising between Ethiopia and Egypt over Ethiopia’s almost complete hydroelectric dam amid fears that it could disrupt water flow in the Nile, a crucial water supply for Egypt

* The Spanish government blocked a €619m takeover of Madrid-based train manufacturer Talgo by a Hungarian consortium on security grounds. Spain is concerned that technology that could be used for Ukraine’s reconstruction could fall into the hands of Hungary’s pro-Russian government, the FT reports

* China has increased the retirement age for both men and women, the first time since 1978

And finally… in Japan, a penguin escaped an animal encounter event after finding a hole in her enclosure. The penguin, named Pen-chan, was bred in captivity and staff were concerned for her safety in the open ocean. After two weeks, Pen-chan was sighted some 18 miles from the point of her escape, swimming freely to staff members to return to her enclosure… cold feet