Weekly Economic Commentary

Data says: Economy is good! Survey says: Americans are not happy!

Chief Economist Eugenio J. Alemán discusses current economic conditions.

Survey after survey after survey has been indicating that Americans feel worse off today compared to the recent past, so much so that many of them indicate that the economy is currently in recession, that the rate of unemployment is the highest in several decades, that inflation is very high today, etc. It is as though Americans have been hit by an incoming train, heads on.

The truth is that things have been improving. But for many Americans, current economic conditions continue to be worse than before the pandemic. Inflation is probably one of the reasons why Americans are feeling worse today. But it is not because inflation is still high—it is not. The problem is that the price level—which is not the same as the rate of inflation—is much higher today than it was before the pandemic. But so are wages and salaries.

Still, the stress felt by many American families is both understandable and real. Think about it, for several decades American families were used to shopping without even considering what was happening to prices because the change in prices—that is, the rate of inflation—was so low that we did not spend much time trying to figure out when, where, what, and how to buy goods and services. However, because prices increased so fast and by so much over the last several years, a typical American family has had to search and consider several alternatives to spending their hard- earned income. This search process is, sometimes, very stressful. How stressful, you may ask? For many families, making a bad purchase decision could mean not being able to make ends meet.

Furthermore, higher inflation not only affects our ability to buy goods and services, but it also affects relative prices. That is, the price of one good compared to the price of a different good because not all goods/services prices in the economy increase at the same rate.

At the same time, from the income side, something similar has happened. Although many wages and salaries have increased to catch up to the higher rate of inflation over the last several years, not everybody has been compensated the same way. Some income earners have fallen behind since inflation started to accelerate; and, although almost every income earner has seen an improvement in real terms (adjusted for the effects of inflation), not everybody is sharing this improvement equally.

The graph below shows real wages and salaries for private industry workers in goods-producing and service-providing industries1. For most of the first decade and a half of this century, real wages and salaries were relatively stable—not better, but not worse. This changed in 2014 when we started to see a strong upward movement in real wages for both, the goods-producing as well as the service-providing sectors.

1This measure of real wages and salaries is an index. This means that it does not show the actual wages earned but rather how real wages and salaries move over time. If the index goes up, it means that the purchasing power of wages is increasing while if it goes down, it means that the purchasing power of wages is declining.

This process ended after the pandemic due to fundamentally higher inflation. However, as the graph shows, the deterioration in real wages and salaries for both sectors ended during the third quarter of 2022 when the Federal Reserve’s increase in interest rates as well as the normalization of supply chains, started to affect the rate of inflation and the disinflationary process started. Since then, real wages and salaries have been increasing though are still below the pre-pandemic levels (but higher than the pre-2014 levels).

This is probably one of the reasons why Americans feel that the economy is in bad shape, because the purchasing power of wages and salaries is still not back to the levels that existed before the pandemic.

But not everybody is worse off today. Some of the workers whose return to the labor force was more difficult because they had to deal with daily contact with the public have fared much better than other workers. Workers in retail trade, accommodation and food services, and in the leisure and hospitality industries, among others, have either kept their real wages intact or have become net beneficiaries of the current economic environment.

Other sectors of the economy; however, have not been so fortunate and have yet to recover their purchasing power compared to pre-pandemic levels as the graph below clearly shows. Regardless, almost every sector of wage earners has seen an improvement in their real wages and salaries as inflation has subsided—even if they have not recovered completely.

But it is true, many Americans are still worse off today than before the pandemic recession even if the economy has continued to surprise to the upside. Thus, both concepts are not mutually exclusive. In other words, the economy is still in good shape, even though Americans are still feeling unhappy!

Economic and market conditions are subject to change.

Opinions are those of Investment Strategy and not necessarily those of Raymond James and are subject to change without notice. The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. There is no assurance any of the trends mentioned will continue or forecasts will occur. Last performance may not be indicative of future results.

Consumer Price Index is a measure of inflation compiled by the US Bureau of Labor Statistics. Currencies investing is generally considered speculative because of the significant potential for investment loss. Their markets are likely to be volatile and there may be sharp price fluctuations even during periods when prices overall are rising.

Consumer Sentiment is a consumer confidence index published monthly by the University of Michigan. The index is normalized to have a value of 100 in the first quarter of 1966. Each month at least 500 telephone interviews are conducted of a contiguous United States sample.

Personal Consumption Expenditures Price Index (PCE): The PCE is a measure of the prices that people living in the United States, or those buying on their behalf, pay for goods and services. The change in the PCE price index is known for capturing inflation (or deflation) across a wide range of consumer expenses and reflecting changes in consumer behavior.

The Consumer Confidence Index (CCI) is a survey, administered by The Conference Board, that measures how optimistic or pessimistic consumers are regarding their expected financial situation. A value above 100 signals a boost in the consumers’ confidence towards the future economic situation, as a consequence of which they are less prone to save, and more inclined to consume. The opposite applies to values under 100.

Certified Financial Planner Board of Standards Inc. owns the certification marks CFP®, CERTIFIED FINANCIAL PLANNER™, CFP® (with plaque design) and CFP® (with flame design) in the U.S., which it awards to individuals who successfully complete CFP Board's initial and ongoing certification requirements.

Links are being provided for information purposes only. Raymond James is not affiliated with and does not endorse, authorize or sponsor any of the listed websites or their respective sponsors. Raymond James is not responsible for the content of any website or the collection or use of information regarding any website's users and/or members.

GDP Price Index: A measure of inflation in the prices of goods and services produced in the United States. The gross domestic product price index includes the prices of U.S. goods and services exported to other countries. The prices that Americans pay for imports aren't part of this index.

The Conference Board Leading Economic Index: Intended to forecast future economic activity, it is calculated from the values of ten key variables.

The Conference Board Coincident Economic Index: An index published by the Conference Board that provides a broad-based measurement of current economic conditions.

The Conference Board lagging Economic Index: an index published monthly by the Conference Board, used to confirm and assess the direction of the economy's movements over recent months.

The U.S. Dollar Index is an index of the value of the United States dollar relative to a basket of foreign currencies, often referred to as a basket of U.S. trade partners' currencies. The Index goes up when the U.S. dollar gains "strength" when compared to other currencies.

The FHFA House Price Index (FHFA HPI®) is a comprehensive collection of public, freely available house price indexes that measure changes in single-family home values based on data from all 50 states and over 400 American cities that extend back to the mid-1970s.

Import Price Index: The import price index measure price changes in goods or services purchased from abroad by U.S. residents (imports) and sold to foreign buyers (exports). The indexes are updated once a month by the Bureau of Labor Statistics (BLS) International Price Program (IPP).

ISM New Orders Index: ISM New Order Index shows the number of new orders from customers of manufacturing firms reported by survey respondents compared to the previous month. ISM Employment Index: The ISM Manufacturing Employment Index is a component of the Manufacturing Purchasing Managers Index and reflects employment changes from industrial companies.

ISM Inventories Index: The ISM manufacturing index is a composite index that gives equal weighting to new orders, production, employment, supplier deliveries, and inventories.

ISM Production Index: The ISM manufacturing index or PMI measures the change in production levels across the U.S. economy from month to month.

ISM Services PMI Index: The Institute of Supply Management (ISM) Non-Manufacturing Purchasing Managers' Index (PMI) (also known as the ISM Services PMI) report on Business, a composite index is calculated as an indicator of the overall economic condition for the non-manufacturing sector.

Consumer Price Index (CPI) A consumer price index is a price index, the price of a weighted average market basket of consumer goods and services purchased by households. Changes in measured CPI track changes in prices over time.

Producer Price Index: A producer price index (PPI) is a price index that measures the average changes in prices received by domestic producers for their output.

Industrial production: Industrial production is a measure of output of the industrial sector of the economy. The industrial sector includes manufacturing, mining, and utilities. Although these sectors contribute only a small portion of gross domestic product, they are highly sensitive to interest rates and consumer demand.

The NAHB/Wells Fargo Housing Opportunity Index (HOI) for a given area is defined as the share of homes sold in that area that would have been affordable to a family earning the local median income, based on standard mortgage underwriting criteria.

The S&P CoreLogic Case-Shiller U.S. National Home Price NSA Index measures the change in the value of the U.S. residential housing market by tracking the purchase prices of single-family homes.

The S&P CoreLogic Case-Shiller 20-City Composite Home Price NSA Index seeks to measures the value of residential real estate in 20 major U.S. metropolitan.

Source: FactSet, data as of 7/7/2023