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“It’s not just my opinion that things are weird,” Derek Thompson told me recently. It’s a fact of life, he explained, that the U.S. economy is behaving very strangely right now.
But first, here are three new stories from The Atlantic.
- What comes after the search warrant?
- How California exported its worst problem to Texas
- The other Ukrainian army
A Flopping Hose
We learned last week that unemployment in the U.S. is as low as it’s been at any time in the past 50 years, and a report released today shows that inflation slowed in July. Those are good things—and yet, economic output has also slowed in 2022, enough that economists are asking whether the country is in a recession.
Isabel Fattal: How should a regular, nonexpert person think about this moment in the U.S. economy?
Derek Thompson: When you’re thinking about the economy, you should think about three categories: statistics, labels, and feelings. Statistics, like the inflation rate or the unemployment rate, come from government surveys, and you should trust them, because they are highly descriptive of what is happening to the broader economy.
Feelings come from your personal experience in the economy. Is your local labor market good? How do you feel about whether your income is holding up against inflation?
Labels come from the National Bureau of Economic Research (NBER) Business Cycle Dating Committee. The label of “Are we in a recession or not?” is determined by eight economists. That has nothing to do with your feelings of the local economy at all.
Isabel: You wrote recently that “Are we in a recession?” is the wrong question to ask. Why?
Derek: There’s two reasons why it’s so hard to say whether we’re in a recession right now. Number one, the NBER is not going to render a judgment for several months, several quarters, or more than a year. So why debate now what we might not know for a year?
Number two, the GDP estimate that we just got from the Bureau of Economic Analysis is just that—an estimate—and the estimate will be revised. There’s about a coin-flip chance that the economy actually grew in the first half of 2022. What we know about recent growth unfortunately isn’t solid.
Isabel: What is one thing we do know for sure about the economy right now?
Derek: We know three things for sure. Number one, we know that inflation is very high, historically speaking—one of the highest rates in the past 40 years. Number two, we know that unemployment is low, as low as it’s been in 50 years. The labor market is roaring.
Number three, we know that growth is slowing down. We know that the GDP growth rate was really high in 2021, and we know that it’s slowing down in 2022. We don’t know if it’s what some economists would call a recession.
Isabel: As you’ve written, we’re in an everything-is-weird economy because different factors are behaving in contradictory ways; for example, jobs are growing, but the economy is shrinking. How should people deal with these mixed messages? What should we be paying most attention to?
Derek: Predicting the future of the economy is so hard that it’s useful to have a single metric to look for. The single metric I would watch is inflation, because if inflation starts to come down, as I believe it will in the next few months [it declined to 8.5 percent in July], the Federal Reserve doesn’t have to keep hacking up interest rates. If interest rates don’t keep going up, then the economy will probably get back to growth. So it all flows from inflation, and if I were interested in figuring out the direction of the economy, I’d be obsessed with watching energy prices, housing prices, and retail spending.
Isabel: How are Americans feeling about the economy right now? There’s a possibility that people’s feelings can actually affect where the economy goes from here, right?
Derek: It’s a really important point. Feelings aren’t imaginary. Feelings drive the economy, to a certain extent. When people are optimistic about the future, they spend more money.
But if you ask consumers how they’re feeling about the economy, they increasingly bifurcate by ideology. Republicans say they’re sad about the economy when a Democrat is in the White House. And Democrats say they’re sad about the economy when a Republican is in the White House. So it’s not as useful as it used to be to ask people about their consumer sentiment, because increasingly, consumer sentiment is just political sentiment.
On my podcast, Plain English, the economist Austan Goolsbee made the great point that in 1992, the entire presidential election was about an economic slowdown that had technically already ended. So statistically, the recession was over, but in vibes and feelings, the recession was deepening, and you had this electoral outcome—the defeat of the incumbent president—hinged on feelings of a recession that actually didn’t exist. That goes to show that even if feelings are disconnected from statistics, they still have real-world outcomes.
Isabel: Is this an unprecedented moment for the economy?
Derek: We’ve never had an economy like this, period. This is a cliché, but I’ve called this the pinched-hose economy. If you turn on the water in your backyard hose and you pinch the hose for a while, the water will build up, and then, when you release the hose, it’ll start sputtering wildly, and the hose will flop all over the place in a violent and strange manner. That’s what happened in the economy. We shut off the hose and said no one will fly, no one will go to restaurants, people won’t go to movie theaters. We purposefully shut down the economy because of the pandemic.
But then demand, which is the water, surged beyond supply’s capacity to easily fulfill it. That’s why we’re seeing the economic hose flopping all over the place. It’s why things are weird with baby formula, with gas prices, with airlines. That’s the hose flopping around. The hose is still flopping.
Related:
- The three biggest mysteries about the U.S. economy
- Why we hate rising prices more than we fear losing our jobs
Today’s News
- Donald Trump took the Fifth Amendment and declined to answer questions from the New York State attorney general’s office in the investigation into his company’s business practices.
- Russian forces killed at least 13 civilians and wounded others in a missile attack in southern Ukraine overnight. Ukrainian special forces also reportedly carried out a strike on a Russian air base in Crimea yesterday, a move that would mark a significant escalation in fighting.
- The Justice Department charged a member of Iran’s Islamic Revolutionary Guard with allegedly plotting to assassinate John Bolton.
Dispatches
- Deep Shtetl: Yair Rosenberg explains how President Joe Biden keeps winning the internet by accident.
- The Weekly Planet: Congress just passed a big climate bill—not the one you think, Robinson Meyer reports.
Evening Read
Hibernation: The Extreme Lifestyle That Can Stop Aging
By Katherine J. Wu
Today’s most elderly bats aren’t supposed to exist. Ounce for ounce and pound for pound, they are categorically teeny mammals; according to the evolutionary rules that hold across species, they should be short-lived, like other small-bodied creatures.
More From The Atlantic
- The “L.A. woman” reveals herself.
- Lessons from a lonely, Trump-defiant Republican
- “History is human”: Remembering David McCullough
Culture Break
Read. The Yellow House by Sarah M. Broom, a memoir set in New Orleans that has an incredible sense of place.
Or try another pick from our list of eight books that grapple with a hard childhood.
Watch. In the mood to solve a puzzle? Watch or rewatch Severance (Apple TV+) or Yellowjackets (Showtime)—but this time, try to follow along with fan theories on the internet, which play a bigger part in shaping modern TV than you might realize.
