By every official measure, the economy seems to be doing well. Personal income, disposable income, and consumption expenditures all increased. GDP growth has been revised upward by both the Bureau of Economic Analysis and the Atlanta Fed. As if that weren’t enough, the stock market continues to climb to historic highs.
Despite these positive reports, there are still concerns. The University of Michigan’s Index of Consumer Sentiment continues its downward trend. Job openings, hires, and total separations are holding relatively constant. This suggests that actual job growth has leveled off, meaning that Americans are likely to face harder times finding a new job should they lose their job or otherwise get furloughed. And while manufacturing seems to be growing in certain regions, it’s also declining in others, and there is evidence of declining producer spending, which could portend hardship down the line as businesses shift toward hoarding cash instead of building capacity. Finally, there’s the concern about America’s agricultural sector, with President Trump promising to divert some of the tariff revenue to farmers in a bid to help them weather the challenges they are facing and are likely to face ahead.
With all of this in mind, economists’ least favorite question, “how is the economy doing?” has but one answer: who knows? The more detailed answer, and one that famously drew the ire of President Truman, “on the one hand, official data looks pretty good. But on the other hand, there are some serious concerns that, going forward, may or may not cause some real problems.”
Understanding this is key to understanding why the talking heads on television news networks seem to be so wrong. Plenty of indicators suggest that things are and have been fine in the American economy for a long, long time. And yet, for years we heard about the “vibecession” where almost every economic indicator was pointing toward a great economy but consumers were inexplicably acting as if we were in a recession. The problem wasn’t with the consumers and, paradoxically, the problem was not with the fancy government statistics. The problem was with the talking heads and their refusal to ask why consumer behavior might be more telling than aggregate indicators.
To help cut through the noise, we can look to other, less obvious sources combined with economic theory. The New York Times, for example, reports that Hamburger Helper sales have risen 14.5 percent just since the start of the year. The theory is that Hamburger Helper sales are loosely correlated with economic recessions; when Hamburger Helper sales rise, it is a sign that consumers might actually have less disposable income and are seeking to stretch their money as far as possible.
Hamburger Helper is far from the only fabled example of quirky statistics that economists use to clarify our supposed crystal balls that allow us to peer into the future. Warren Buffet famously popularized the “men’s underwear index,” reasoning that men are more likely to buy underwear only when flush with cash, which happens during a boom. The Baked Beans Index, similar to the Hamburger Helper theory, suggests that baked bean sales spike during a recession.
The reason behind this is straightforward according to economic theory: these goods, and plenty of others, are often characterized as inferior goods. Here, “inferior” does not necessarily mean “of low quality.” Instead, it refers to the idea that when a person’s income rises, their demand for any given product will change. For inferior goods, income and demand move in opposite directions: when one increases, the other decreases. For so-called “normal goods,” like beef, fresh vegetables, and new cars, income and demand move in the same direction: when one increases or decreases, the other moves in the same direction.
Consider a college student, toiling away late at night, working on esoteric papers and assignments foisted upon them by their malevolent professors. What is their diet likely to consist of? Instant ramen noodles, spaghetti, and (hopefully) some vegetables, though probably not the “organic” kind. But as their incomes rise after graduation, notice what happens: they stop eating instant-anything and shift toward healthier, tastier, and more expensive options. This reflects the idea that instant ramen noodles, spaghetti, and non-organic vegetables are inferior goods. Indeed, the hit song, “If I Had a Million Dollars” by the Barenaked Ladies is really just a song about normal and inferior goods. Chesterfields, ottomans, K-Cars, pre-wrapped sausages, fur coats (but not real fur coats), and exotic pets (like a llama or an emu)? All normal goods. Kraft dinners, in a subversive twist, also considered a normal good by Barenaked Ladies, provided, of course, that they come with “Dijon ketchup.”
The truth of the matter is that individuals know whether they lost their job or not. They know full well whether their industry is in decline or if it is booming. Individuals don’t need fancy government statistics to tell them what they already know. Because of this, changes in their behavior often precede changes in official government statistics, no matter how good those statistics actually are.
So how can an average person do better economic analysis than the talking heads? Start with a basic principle from Nobel Laureate James Buchanan: “What a science does, or should do, is simply to allow the average man, through professional specialization, to command the heights of genius.”
The easiest way to do this is to recognize that the economy is not some abstract thing measured by government statisticians. It’s millions of individual people making millions of individual decisions each and every day. When people start buying more Hamburger Helper, that should tell you something that GDP figures just can’t capture. The American people are not confused or somehow acting irrationally, they’re just responding to real pressures in their own lives that haven’t shown up in the aggregate data (yet).
If you want to get a broader picture of the economy, rather than start the investigation at national level data, start local. National level data often gives an inaccurate summary of the overall economy. It’s like pointing out that everyone in a restaurant is, on average, a millionaire after Bill Gates walks in. No matter how accurate the statement, it’s still mostly meaningless. Pay attention to what people around you are actually doing. Are your neighbors buying Hamburger Helper or steaks? Are local businesses hiring or laying off? That tells you more than any GDP revision ever could.This is why Hamburger Helper sales matter more to everyday Americans than GDP revisions; they reveal what’s actually happening in people’s lives by reflecting data at the lowest level of analysis: the individual. Washington bureaucrats may carp about the fancy government statistics, but a thousand new tech jobs in California or in the hospital system in North Carolina don’t help the manufacturing workers being laid off in Michigan. The economy isn’t doing well or poorly. It’s doing differently for different people and the people living it know first and best.