Global economy: Big on vibes

The economy is a snapshot of people’s activities — i.e. the allocation of resources including money and time. When the economic story becomes too noisy to interpret, and too much bad air conquers the circulating narrative, it can lead people to expect the worst. What people expect can soon end up happening, and right now – with worsening economic data – many people have come together to expect a recession. And those expectations could very well lead to one.

There is not much left to say in the semantic debate over whether the United States two straight quarters of GDP contraction amount to a recession. Two consecutive quarters of contraction is indeed a common rule of thumb for a recession. But more important than the precise definition of a “recession” is what the new data says about how the economy is evolving. On that front, the details of the GDP report are pretty gory – emphasizing the recession specter. But is the global economy really manifesting a recession?

There is a reason why expectations matter in economic behavior. Boom-and-bust cycles remain a seemingly inescapable feature of capitalist economies, and the sentiment is a pretty solid indicator for them. Fear and pessimism can become contagious. How one person feels can quickly compound into how everyone feels, and that can influence widespread decision-making, causing a shift in spending, investment, and savings. These are key components of GDP and underscore the influence that animal spirits (i.e. our feelings, emotions, beliefs, and psychological quirks) have on the economy. Economic agents (consumers and businesses) can retreat, and cause the economy’s total demand – and invariably total spending – of goods and services in an economy to drop.

Right now, there are big differences in expectations (how people expect things to be), theory (how things are supposed to be), and reality (how things are) – which creates a lot of cognitive dissonances. The uncertainty that all these create is visceral, and it shows up in the average person’s life in a painful and prevalent way. With inflation as the boogeyman in the room, there is an overwhelming bad feeling that is fueling bad vibes about the economy, and consumer confidence metrics are reflecting people’s worry and uncertainty.

Inflation transitioned from an ‘unknown unknown’ to a ‘known unknown’. If people expect the high inflation scenario to persist, they will increase the price of the businesses or products, or ask for raises at their jobs – perpetuating the price increases. The self-fulfilling nature of the inflation cycle creates a vibecession – where economic sectors are doing okay-ish, but people are not and are feeling bad. The bad mood comes from weakening worker power, and falling real wages, and the darkened animal spirits can prompt people to slam the brakes on consumer spending, and drag the economy into an actual slump, irrespective of what economic data currently suggests.

Regardless of whether you call it a recession, a “vibecession”, or a soft patch, the fact remains that the vibes in the economy are weird and far from groovy, and the weirdness is bound to have real effects on the still-fragile economy. At the moment, the only certainty is uncertainty, and that uncertainty has sent central banks on a fast-and-furious mode battle against inflation. The catch-22 situation is that central banks could care less about the unmellow vibes at this point because they have to rein in the inflation that is causing those negative vibes. This means more rate hikes are in the offing and could intersect with economic agents shutting their wallets – creating an even worse vibe shift.