Watch What They Do, Not What They Say

The Pitch: Economic Update for November 18, 2021

(The Pitch is a weekly economics newsletter written by Zach Silk. Sign up for free on Substack to receive a new issue in your inbox every Thursday.)

For several months this summer, the Bureau of Labor Statistics reported that the United States experienced a dramatic slowdown in hiring and job growth, inspiring economists and politicians to try to understand why and how the recovery was stumbling. Now Andrew Van Dam reports for the Washington Post that the BLS drastically underestimated job growth for most of this year. Just from June to September, the jobs reports “underestimated job growth by a cumulative 626,000 jobs — that’s the largest underestimate of any other comparable period, going back to 1979. If those revisions were themselves a jobs report, they’d be an absolute blockbuster,” Van Dam writes. The visualization of what these revisions look like is astonishing:

All those dour headlines about a lackluster recovery that you read this summer were based on faulty data — America has been steadily adding jobs for most of the year. Let’s be clear: There’s no insidious conspiracy to undermine the Biden administration, here. No living economist has ever had to compile employment data in the second year of a global pandemic before, and huge mistakes were bound to happen. We’ll be learning about the true economic impacts of this pandemic for many years to come. But bad news always travels faster than good news, and so I wanted to highlight this development up at the top of the newsletter: employers are hiring, Americans are going to work, and the economy is making strides in the right direction. As an animated representation of that fact, Ben Bakkum tweeted a stunning graphic comparing the history of labor market recoveries from American economic downturns, and it really puts in perspective both the depths of the job collapse at the beginning of the pandemic, and the relative speed and trajectory of the recovery in the days since.

The Latest Economic News and Updates

Retail sales way up, consumer confidence way down

This week, US retail sales continued a three-month upward trend, hitting another all-time high with a 1.7 percent gain in spending. At the same time that retail sales are soaring, the University of Michigan’s Consumer Sentiment Index, which measures consumer economic confidence, is at a decade low. How can Americans say that they’re reluctant to spend money while at the same time enthusiastically spending money in retail stores, driving surprising profits for Walmart and Home Depot? Obviously, inflation has something to do with the question of consumer sentiment, but that depressed sentiment doesn’t seem to have any bearing on how consumers are spending their money. And inflation certainly isn’t to blame for those higher retail profits: government data suggests, as Coral Murphy Marcos and Ben Casselman note for the New York Times, that “even when adjusted for inflation, consumer spending is higher than it was before the start of the pandemic.”

Inflation is scary, and modern consumers don’t know what to do or expect from rising prices. When the price of beef at the supermarket rises by 20 percent in a matter of months, consumers are going to notice that. But as long as they still have the means, they’re going to buy the beef to feed their families. However, Richard Curtin, the Chief Economist at the University of Michigan, is sounding an alarm bell about the Consumer Sentiment Index. As Ben Winck and Andy Kiersz note for Insider, partisan preference is the most pressing indicator for how people respond to the Consumer Sentiment Index. Democrats are more likely to say they feel confident about the economy, and Republicans are more likely to say they feel terrible about the economy. The divide between Democrat and Republican sentiment in the University of Michigan study nearly reached 50 percentage points, basically rendering the results unusable. In fact, Republicans report feeling worse about the economy right now than they did at the worst of the economic downturn in 2008, when the global economy was teetering on the edge of collapse.

Is partisanship ruining economic data?

Does all the above mean consumer sentiment reports have lost their value in a time of increased vitriolic partisanship? Possibly. The uncomfortable truth is that self-reporting has always been an unreliable metric when it comes to economic matters. Before minimum-wage increases happen, for instance, employers always report in surveys that they’ll lay workers off and raise prices by a considerable amount. But those layoffs and price increases don’t materialize when the wage actually goes up.

A good rule of thumb for economic analysis is this: When given a choice between analyzing what people say they’re going to do and analyzing what people actually do, always emphasize the actions, not the words. Or as investor Charlie Biello puts it, “watch what they do, not what they say.” This isn’t an ideal solution. Hopefully partisan rancor will subside to the point where guidelines like consumer sentiment can again be useful. But when the actions of politicians are fed into partisan echo chambers that amplify every policy fight into an apocalyptic battle between good and evil, that animosity is going to eventually insinuate itself into economic surveys. That’s how consumer confidence figures can land in the basement at the same time that macroeconomic analysis from Pantheon Macro can predict “a blockbuster holiday season.”

Inflation continues to inflate

The Washington Post has identified inflation as the “defining economic challenge of the Biden presidency,” with several graphics showing exactly where prices are rising and how much:

No one can argue that skyrocketing prices on essentials like food and energy are a good thing. But Joe Weisenthal correctly points out that inflation is not specifically President Biden’s problem. It’s also climbing around the world, including the UK, “despite a significantly more hawkish government and central bank than in the US.” Economist David Rothschild suggests that our two options coming out of the pandemic were either a crushing recession that kept prices low or a roaring economy with rising prices. “Much better for all of US to have transitory inflation than continued recession,” he concludes. (And though it’s true that economists have been saying for months that the inflation is transitory, journalist Carl Quintanila reports that Morgan Stanley still predicts a “continued easing of supply chain bottlenecks toward more normalized flow” next year.)

The future of party politics is in flux

Ryan Grim at The Intercept published the results of a troubling Democratic focus group, which found that while Democratic leadership is worried about losing white voters to the Republican Party, the truth is that they’re losing voters of all races. The focus group served as an autopsy on why Democrats lost ground in the Virginia off-year elections earlier this month, and it found that due to issues like education, “Democrats have seen a steady erosion in support among working-class voters of all races.” While it’s never a good idea to trigger alarm bells over a single study like this one, Democrats heading into the midterm elections should be paying close attention to the issues that matter most to everyday Americans, and devising meaningful responses to those issues. A good place to start is always paychecks — if people have more money, they’re likely to feel better about their communities.

But before we start diving too far down partisan rabbit holes, I want to call your attention to G. Elliott Morris’s excellent recent Substack post explaining that when you drill down into policy, political polarization is dramatically overestimated, both by partisans and the media. In his exploration of a massive recent Pew study that explored the wide variety of American political beliefs, Morris reports that Pew found “a lot more bipartisan agreement on, eg, economic policy than a naive glance at the groupings suggests. Over 75% of people in the ‘Populist Right’ bucket, for example, think that corporations make too much profit — roughly the average for all of the left-leaning groups — and about 60% of them think the government should raise taxes on households earning more than $400k annually.”

In other words, policies that benefit the majority of the population are popular regardless of partisan slant.

Is a recession the only way to kill inflation?

In a wonky economics thread, the Wall Street Journal’s Jon Sindreu questions the commonly held assumption that the Federal Reserve can calm spiking inflation simply by raising interest rates. “Even if we accept monetary policy was the key variable that tamed inflation (it’s at least debatable),” he writes, “we are talking about a massive, sudden hike that affected inflation by inducing recessions. This wasn’t micromanagement, it was brute force.”

While experts on cable news shows casually talk about the Fed ending inflation through heightened interest rates as a painless way to stabilize the economy, Sindreu translates that mechanism into plain English: Doing so would result in a recession and higher unemployment rates. While ordinary people are paying the price of inflation now, the Fed’s cure would almost certainly exact another price from the American people.

Real-Time Economic Analysis

Civic Ventures provides regular commentary on our content channels, including analysis of the trickle-down policies that have dramatically expanded inequality over the last 40 years, and explanations of policies that will build a stronger and more inclusive economy. Every week I provide a roundup of some of our work here, but you can also subscribe to our podcast, Pitchfork Economics; sign up for the email list of our political action allies at Civic Action; subscribe to our Medium publication, Civic Skunk Works; and follow us on Twitter and Facebook.

• On Civic Action Live this week, we’ll discuss the factors causing the rise in inflation and explore how partisanship affects our perception of the economy. And as always, we’ll be answering your questions in real time.
• In this week’s encore presentation of a January 2020 Pitchfork Economics podcast, American Prospect executive editor David Dayen and Financial Times associate editor Rana Foroohar join Nick and I to explain the many ways that the government subsidizes parasitic corporations which exploit workers at everyone’s expense, and how we can get the so-called “parasite economy” under control through changes in the tax code.
• In his Business Insider column, Paul explains how the tax code is constructed in a way to advantage white wealth and disadvantage Black Americans. He also envisions how to build a tax code that is free of racist outcomes — and which works better for the vast majority of Americans, regardless of color.

Closing Thoughts

While the economic conversation has turned, almost single-mindedly, to inflation, we should keep in mind that American workers are currently enjoying more leverage than at any moment in the 21st century. Almost four and a half million American workers left their jobs in September, more than in any other month on record — and those workers aren’t just leaving their jobs for higher-paying jobs elsewhere, they’re also making it easier for the workers who stay behind to get raises.

These are unprecedented times — and for once, it’s the good kind of unprecedented, with workers trying to make up for decades of wage stagnation while the market is working in their favor. And strikes are continuing around the nation, with Kroger employees in Houston voting to go on strike and John Deere workers voting yesterday to approve a new contract promising, as ABC News’s Catherine Thorbecke reports, “a $8,500 signing bonus, a 20% increase in wages over the life of the contract and 10% this year as well as cost of living adjustments, three lump-sum payments and changes to retirement and performance benefits.” This worker empowerment feels like a realignment, the opening of a door which can never be completely closed again. It’s an exciting time.

Be kind. Be brave. Mask up. Get vaccinated.

Zach