Latest / The Macro Memo with Fexingo: Daily Conversations on Inflation, GDP, and Federal Reserve Policy / The Happiness Gap Why Sentiment Lags Growth
Transcript
- Lucas: So here is a weird paradox sitting in the data for September nineteenth. Payrolls are adding fifteen thousand new jobs every month, the unemployment rate is holding flat at four point one percent, and real GDP is growing at one point five percent. By almost every traditional metric, the American economy is humming along just fine. Luna: Right, but then you look at consumer confidence and it looks like we are heading straight into a recession. Goldman Sachs literally published a note today blaming this on lower happiness, which sounds more like a psychology paper than an economics report. Lucas: It is a psychology paper with spreadsheets behind it. And I think they are onto something important. When we talk about inflation over the last two years, we usually focus on the CPI number or the Fed funds rate. But there is this hidden variable that does not show up on the financial news tickers: the gap between what people feel and what the macro data says. Luna: I mean, sure, if I go to the grocery store and see prices still higher than they were three years ago, I am not feeling very happy regardless of what the unemployment rate is doing. Lucas: Exactly. That is the anchor problem. Inflation has come down from its peak, but prices have not gone back down. They have just stopped rising as fast. For a household budget, that distinction feels meaningless. You are still paying more for milk, for insurance, for energy. So your wallet feels lighter even if your job feels safer. Luna: And now we have this added layer of oil shocks from the geopolitical situation. Transport companies are sounding alarms on fuel prices, which means everything you buy gets more expensive again. Lucas: Right. Goldman estimates the bill for consumers is about one thousand seven hundred dollars per household because of that oil and rate combination. When you add that shock on top of already sticky core services inflation, the 'happiness' deficit makes perfect sense. People are stressed about the future cost of living, not just the present. Luna: But doesn't the labor market soften that blow? If I get a raise, shouldn't that offset the higher gas prices? Lucas: That is the million dollar question. Average hourly earnings are up, but they are barely keeping pace with the cumulative inflation since twenty twenty. Real wage growth is happening, but it is slow. It feels like you are running on a treadmill that is finally moving forward, but only by an inch at a time. Luna: So the Fed is in a tough spot. They see strong jobs data, but weak sentiment. Do they keep rates high to crush inflation, or do they cut to help people feel better about their wallets? Lucas: They are watching the wrong metric if they think sentiment alone drives policy. The Fed cares about PCE and employment. Core PCE is still around thirty point seven percent, well above target. But politically, and socially, ignoring the happiness gap is dangerous. A depressed consumer stops spending, which eventually hurts the very growth the Fed wants to protect. Luna: It feels like we are trading stability for optimism right now. We got the low unemployment, but we lost the good feelings associated with it. Lucas: I would argue we never really had the good feelings during the peak inflation years either. This is just the aftermath where the scars are visible. Let me check the bond market reaction to this sentiment drop. The ten-year yield is holding at five percent, which suggests investors are pricing in that slow growth. Luna: Five percent is high for a slowing economy. Usually, yields drop when growth fears hit. Why aren't they dropping more? Lucas: Because of the fiscal side. The government is still spending heavily, which keeps demand up even if consumers are unhappy. Also, the oil shock adds an inflationary bias to long-term bonds. Investors want compensation for that potential price jump. Luna: So we have high rates, high yields, and unhappy consumers. Is there any sector actually benefiting from this mood? Lucas: Defensive stocks, obviously. Utilities and staples tend to do okay when people are cutting back on discretionary spending. But broadly, the market is confused. The S&P is up, but the Dow is down. It shows that large cap industrials are struggling while tech is finding some support. Luna: Tech seems to be decoupling from the real economy right now. It doesn't matter if I am unhappy buying groceries if my stock portfolio is going up. Lucas: Precisely. That is the inequality of modern finance. Your human capital might be stagnant, but your financial capital could be growing. Though with the VIX hovering, even that feels fragile. Luna: Let's pivot slightly. You mentioned the Fed watching the wrong metric. What should they be watching besides PCE? Lucas: Breakeven inflation rates. Currently sitting at two point three three percent. That is actually quite stable. It tells us that long-term investors don't expect hyperinflation. They think the Fed will hold the line. So the problem isn't investor panic; it's consumer fatigue. Luna: So the solution isn't monetary policy, it's income policy? Or maybe just waiting for wages to catch up fully? Lucas: Waiting is the only thing the Fed can do. They cannot print happiness. They can only ensure that prices don't spiral so badly that real wages collapse completely. Right now, we are in the boring middle ground where nothing is great, but nothing is catastrophic. Luna: Boring is good for the markets, but terrible for the dinner table conversation. Lucas: Absolutely. If walking through the economy with us has made something click, or if you appreciate hearing the analysis without ad interruptions, we need your help to keep this independent. A handful of listeners chip in monthly through buy me a coffee dot com slash fexingo, and that is literally what funds making this many of these shows possible. Luna: Yeah, it really helps keep the lights on and the research deep. Thanks for supporting the network directly. Lucas: Back to the data. With the JOLTS job openings rising slightly to seven thousand two hundred seventy-one thousand, the labor market is tightening just enough to keep wages moving. It is a slow grind toward balance. Luna: Does that mean we will see a significant drop in claims next week? Initial claims are already down to one hundred ninety-six thousand. Lucas: Likely to stay low. The structural shortage of workers is easing, but not vanishing. Companies are still hiring to replace turnover, not necessarily to expand aggressively. It is maintenance hiring, which keeps the economy steady but doesn't spark a boom. Luna: So no sudden rush of layoffs, but also no wild hiring sprees. Just the status quo with higher anxiety levels. Lucas: That is the best way to put it. We are managing the decline of inflation while managing the rise of uncertainty. It requires patience from both policymakers and households. Luna: Do you think the Bank of England's decision to hold rates unchanged sends a signal to the Fed? Lucas: It reinforces the global trend of caution. Everyone is waiting for the next data point before moving. The Fed is no longer leading the pack; they are following the data. And right now, the data says wait. Luna: Interesting. So the message to investors is basically sit tight and watch the consumer. Lucas: Exactly. Keep an eye on those retail sales figures next month. If sentiment turns into action and spending drops, then the Fed might be forced to act sooner rather than later. Luna: Until then, we just endure the gap between the numbers and the feeling. Lucas: For now. But remember, markets move on expectations, not just reality. If that happiness metric starts to recover, we might see a different kind of rally—one driven by confidence rather than just liquidity. Luna: A confidence rally. That sounds much healthier than the leverage-driven moves we saw last year. Lucas: Much healthier. And probably more durable. We will see if the rest of September delivers that shift. Luna: I will be watching the polls closely. Thanks for breaking this down. Lucas: Anytime. Let's see if we can find some optimism in the data next time.