Latest / The Macro Memo with Fexingo: Daily Conversations on Inflation, GDP, and Federal Reserve Policy / Why Household Financial Anxiety Hit a Four-Year High
Transcript
- Lucas: Luna, I want to talk about a number that kind of stopped me this morning. The New York Fed's Survey of Consumer Expectations came out yesterday, and it shows that household worries over personal finances have hit their highest level since July of 2022. Luna: That is striking, because July 2022 was right in the middle of peak inflation panic. The CPI was running above nine percent back then. Lucas: Exactly. And we're in a very different macro environment now. Headline CPI is around three and a half percent. Unemployment is still at 4.3 percent — low by historical standards. Nonfarm payrolls hit a record 159 million in May. So on paper, the aggregate economy looks pretty solid. Luna: But the vibes are off. That gap — between strong aggregate data and rising personal anxiety — has been the story of this whole cycle. Some people called it a 'vibecession' back in 2023. Lucas: Right. And now we might be looking at what you could call 'vibecession 2.0.' The difference is, the first one was mostly about inflation outrunning wage gains. People felt poorer because their paycheck didn't go as far. Today, wages have finally caught up — average hourly earnings are up to $37.50 — but financial anxiety is spiking again. Luna: So what is driving it this time? Because it's not the same story as 2022. Lucas: I think it's a combination of things. First, the cumulative effect of higher prices. Even if inflation is moderating, the price level is not going back down. A gallon of milk costs what it costs now, and that's permanently higher than three years ago. Second, interest rates. The ten-year yield just touched 4.55 percent. If you carry credit card debt or are trying to buy a house, that's a real squeeze. Luna: And mortgage rates have been above seven percent for a while now. So the housing market is frozen for a lot of people. They can't afford to move, they can't afford to buy, and renting is also expensive. Lucas: The New York Fed survey actually digs into some of these components. One of the most telling sub-indexes is the one about households' expectations for their own financial situation a year from now. That dropped sharply. And it's not just about inflation — it's about job security too, even though the headline job market looks fine. Luna: I saw that the NY Fed survey also had a notable rise in the share of people who said they'd be worse off financially a year from now. That's a forward-looking measure, which is worrying. Lucas: Right. And if you look under the hood of the labor market, there are some cracks. Long-term unemployment is surging — we touched on that a few episodes ago. The JOLTS report showed 7.6 million job openings in April, which is a recovery from the dip in March, but the quality of those openings matters. A lot of them are in low-wage sectors, and the quit rate has been declining. People are hunkering down. Luna: The quit rate is a great barometer of worker confidence. When people are quitting a lot, they feel they can find a better job. That's been dropping. So even if the jobless rate stays at 4.3 percent, the internal dynamics of the labor market are softer. Lucas: That's the nuance that gets lost in the monthly headline. The unemployment rate can stay low while more people are working part-time involuntarily, or while prime-age labor force participation plateaus. And when you combine that with high interest rates and elevated price levels, you get this anxiety spike. Luna: The Fed has to be watching this. They're data-dependent, but the data they care about most is inflation. Core PCE is still at 2.8 percent, well above their target. So they're in a bind: if they cut rates to ease financial pressure on households, they risk reigniting inflation. If they hold steady, anxiety might keep building. Lucas: And the market has been pricing in a rate cut later this year, but the timeline keeps getting pushed. The effective fed funds rate is at 3.63 percent, and the futures market is currently pricing the first cut in September or November. But if this consumer anxiety starts translating into lower spending, that could change the calculus pretty quickly. Luna: Consumer spending is still the engine of the economy. If people pull back because they're worried, that would slow GDP growth. The latest real GDP growth annualized was only 1.6 percent — that's not exactly robust. Lucas: So we have this fragile equilibrium: moderate growth, sticky inflation, a labor market that looks fine in the aggregate but has soft spots, and a consumer that is increasingly anxious. The New York Fed survey is a canary in the coal mine. It's not a recession signal by itself, but it's a warning that the household sector is feeling strain. Luna: I want to push back a little, though. Households have been saying they feel terrible for years now, and they've kept spending. The savings rate is low, but credit card debt has been rising. So maybe the survey is just capturing a mood, not a behavior change. Lucas: That's a fair point. There's been a persistent disconnect between sentiment and spending. But the thing is, that disconnect can't last forever. Eventually, if people feel bad enough, they do change behavior. And we might be seeing early signs: initial jobless claims ticked up to 225,000 for the week ending May 30th. That's not a big jump, but it's a direction. Luna: And the ADP private payrolls report for May came in at 122,000 — stronger than expected, but that's still below the pace needed to keep up with population growth. So the labor market is absorbing new entrants, but not at a robust clip. Lucas: Let's bring this back to the Fed. The FOMC meets next week — June 16th and 17th. They're widely expected to hold rates steady. But the statement and the dot plot will be scrutinized for any shift in tone. If they acknowledge this anxiety data, that could signal they're getting closer to a cut. If they don't mention it, the market might interpret that as hawkish. Luna: I think they'll mention it in passing but frame it as a lagging indicator. The Fed tends to focus on actual inflation and employment data, not surveys. Lucas: You're probably right. But the thing is, surveys can become leading indicators when they reach extreme levels. This is the highest reading for household financial worries since July 2022, and that was followed by a significant market downturn later that year. So it's worth paying attention to. Luna: If today was actually useful to you, one way to keep these conversations ad-free and independent is through listener support. Lucas: Yeah, we don't run ads, and that's intentional. If you find value in walking through the economy with us, you can support the show at buy me a coffee dot com slash fexingo. It's a small gesture that helps us keep doing this. Luna: Exactly. And it means a lot. So back to the divergence between data and sentiment — what do you think is the single biggest factor driving that gap right now? Lucas: I think it's the cost of credit. The ten-year yield at 4.55 percent, the two-year at 4.29 percent — those rates filter through to everything. Car loans, credit cards, student debt. Even if you're not borrowing, the opportunity cost of not having your money invested is high. People feel like they're running just to stay in place. Luna: And that's a feeling that doesn't show up in the GDP numbers. But it shows up in the New York Fed survey loud and clear. Lucas: Right. So the bottom line for me is: this survey is a warning light. It doesn't mean recession is imminent, but it means the household sector is under pressure that isn't visible in the top-line jobs number or the inflation rate alone. If you're in markets or just trying to plan your personal finances, it's a signal to be a bit more cautious. Luna: And we'll get the May jobs report this Friday, which will give us another piece of the puzzle. The whisper number is for around 180,000 new jobs. If it comes in weaker, that could amplify the anxiety we're seeing in this survey. Lucas: Exactly. We'll be watching. For now, the key takeaway is that the macro picture is more fragile than it looks on the surface. Thanks for joining us on The Macro Memo. Luna: We'll be back tomorrow with more.