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Americans Are Still Really Worried About The Economy

This is In Real Terms, a new column analyzing the week in economic news. We’re still experimenting with the format, so tell us what you think. Email me or drop a note in the comments. And thank you for all the great feedback so far!


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Back in November, I described what I called the “Iowa paradox”: The economy, especially in Iowa but also nationwide, is improving, yet voters are rallying behind candidates (most notably Donald Trump, but also Ted Cruz, Bernie Sanders and others) who tap into a deep well of economic unease.

With just days to go before the Iowa caucuses, that paradox was again on full display this week. On the one hand, Donald Trump is surging — fueled, as both The Wall Street Journal and The Washington Post showed, by voters’ economic anxieties. (Trump is now favored in both of our two election forecasts in Iowa.) On the other hand, new data this week showed that the housing market is continuing to improve, layoffs remain low and consumer confidence rose in January, suggesting that many Americans are feeling better about the economy.

How can Americans be feeling optimistic and pessimistic about the economy at the same time? One common explanation is that the optimists and the pessimists are two different groups of people. Maybe Trump and other out-of-the-mainstream candidates are drawing their support from those left behind by the economic recovery.

There’s probably some truth to this theory. The economic gains of the past few years have gone disproportionately to the wealthy, while incomes for the typical family have barely budged. And polls show that Trump’s support is especially strong among less-educated blue-collar workers, one of the groups that has struggled most in the recovery. (This is significantly less true of Sanders, who performs as well or better among wealthier, better-educated voters as he does overall.)

But this is a partial explanation at best. Trump and other insurgent candidates are polling well even among groups that are doing better economically. And in any case, the recovery has become more broad-based of late. Median household income has finally returned to its prerecession level, according to an analysis of government data by Sentier Research, and the recent decline in the unemployment rate has been driven primarily by the least-educated workers. Wednesday’s strong housing data showed that recent price gains have been concentrated among mid-price homes, not the luxury mansions that drove price increases earlier in the recovery. And the recent turmoil in the stock market will mostly hurt wealthier Americans.

It’s possible that voters, with memories of the recession still fresh in their minds, simply don’t believe the signs of progress, or worry they won’t last. But here’s another explanation: Americans are feeling better about the economy right now, but they remain deeply worried about their longer-run prospects — retirement, student debt and, in particular, the ability of their children to find middle-class jobs. This shows up in Gallup polling data, which shows a marked divergence between Americans’ assessment of their current conditions and their future outlook.

Those fears are grounded in economic reality. Wages may have rebounded from the recession but they have been largely flat since 2000 after adjusting for inflation. A college degree, long the surest pathway to the middle class, is no longer such a sure bet. And a growing group of influential economists are arguing that the U.S. has entered a prolonged period of slow growth. Few economists would endorse Trump’s plans for dealing with that stagnation, but it’s understandable that voters are looking for solutions.

Snow in winter

In case you hadn’t heard, it snowed on the East Coast last weekend (Snow! In January!), which brought the inevitable raft of “What will the blizzard mean for the economy?” stories. The general consensus: not much. Snow is bad for retail stores and restaurants, but it’s good for tow trucks and maintenance crews (also, apparently, for Tinder). Hurricanes, earthquakes and other disasters that cause widespread structural damage are a different story, but snowstorms rarely amount to more than an economic blip. Most analysts put the storm’s economic impact in the single-digit billions of dollars, which is rounding error in a $15 trillion economy. (It didn’t hurt that the storm hit over a weekend, and that New York City was pretty much back to normal by Monday morning.)

The Fed

In a decision that surprised no one,1 the Federal Reserve left interest rates unchanged at its meeting on Wednesday. A rate hike was never likely; the Fed raised rates in December for the first time since the financial crisis, and few economists expected another move so soon. But the tumultuous start to the year in financial markets pushed a rate hike from “unlikely” to “unthinkable”; the biggest news out of Wednesday’s meeting was that the Fed didn’t take a March rate increase off the table entirely. (If the Fed was trying to reassure investors, it didn’t work. Stocks fell sharply after the announcement.)

Investors will parse the statement for every possible hint of what the Fed will do next, but for the rest of us, the key takeaway is this: Janet Yellen and co. don’t yet see much sign that the economy has changed significantly since their last meeting. But the slowing global economy, and the financial turmoil it is causing, are sufficiently worrisome to have the Fed’s attention. For now, policymakers are sticking to their plan of gradually pulling back from efforts to stimulate the economy. But that could change if trouble spreads.

Number(s) of the week

Americans started 232,000 new businesses employing 831,000 people in the second quarter of 2015, according to new data released by the Bureau of Labor Statistics this week. Both numbers are a hair better than a year earlier, and significantly improved from the depths of the recession. But the employment number, at least, is still well below its prerecession level.2

A couple weeks back I mentioned the decline in “labor market dynamism,” the slowing rate at which Americans change jobs. This week’s data reflects a parallel decline in “business dynamism,” the rate at which new companies are created and destroyed. It’s little surprise that startups fell in the recession, but the trend goes back much further than that, to at least the early 1980s. For all the talk of “disruption” in Silicon Valley, the U.S. economy is becoming increasingly dominated by large, established firms.

Economists aren’t sure what’s behind the twin declines in labor and business dynamism, but they believe the trends are related — and could be making the overall economy less efficient and innovative.

A warning

This morning, the Bureau of Economic Analysis will release its preliminary estimate of economic growth in the final three months of 2015. The report will likely show that gross domestic product grew very slowly at the end of the year, possibly at a rate of less than 1 percent.

My advice: Ignore this number. As my colleague Andrew Flowers explained in greater depth a couple of years ago, preliminary GDP estimates are little more than rough estimates. The average revision between the initial “advance” report and the “final” one two months later is more than half a percentage point, a huge difference in GDP terms. And even that number is routinely revised in subsequent years. (In the world of GDP, no number is ever truly final.) The details of the report can contain valuable insights for people willing to dig through them, but the top-line number that will make the headlines is nearly useless.

Elsewhere

Economist Robert Gordon says to worry about weak productivity growth, but not to blame robots.

School lunches are getting healthier, but kids aren’t actually eating them. Deena Shanker looks at economists’ efforts to change that.

Can you identify an economic trend just by the chart? Take this quiz by Andrew Van Dam and Lam Thuy Vo and find out.

Y Combinator, the Silicon Valley startup incubator, wants to fund a study on the viability of a “universal basic income,” the idea of getting rid of the traditional safety net and just giving people cash.

Footnotes

  1. Not one of the 40 economists polled by CNBC predicted a rate hike.
  2. A quick data note: These numbers technically measure new “establishments” (individual locations of a business) not new companies — think of the difference between a Wal-Mart store and Wal-Mart Stores Inc., the corporate parent. Separate data from the Census Bureau measures parent companies. Those numbers aren’t as up to date, but they show a similar trend.

Ben Casselman is a senior editor and the chief economics writer for FiveThirtyEight.

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