The Economy: Why Are We So Depressed with All this Good News?

Even as the deficit debt ceiling debacle was narrowly avoided, even as our overall economic numbers are up, there is an overall unease across the land. Is it the rise in shootings or the rise in prices? Is it political polarization or the great line of demarcation between the haves and the have-nots? Is it the war in Ukraine or the Culture War? Some companies are doing egregiously well, while others are twisting on the vine. Is it a political system that seems to tell us all, we are ungovernable? Have Americans lost faith in government? Its largest financial and business institutions? Each other? The rest of the world?

Writing for the May 30th FastCompany.com, James Surowiecki explains: “Even with unemployment at just 3.5%, polls show that most Americans think the economy’s headed in the wrong direction. The University of Michigan consumer-sentiment survey has fallen to near historic lows, reflecting pessimism about both the current state of the economy and future expectations. The main reason? Inflation, of course, which around a third of consumers say is causing them major financial strains.

“And yet amid all this gloom about rising prices, something odd has been happening: Consumers have just kept spending, even on things that aren’t normally thought of as necessities. In late April, Pepsi said its North American revenue had risen by double digits in the first quarter, and that it expected profits to be up solidly for the year. A couple of weeks later, Anheuser-Busch trounced Wall Street expectations, with its first-quarter profits rising almost 14%. Both Pepsi and Anheuser-Busch have hiked prices substantially over the past year. And instead of scaring customers away, that’s mainly resulted in a big boost to these companies’ bottom lines.”

But even in that stock market, the results are relatively uneven. Writing for the May 31st New York Times, notes that as parts of tech-world have sunk, other parts are soaring: “Gains in the U.S. stock market this year have been concentrated among a handful of immensely valuable tech companies. [With a heavy emphasis on AI, t]echnology and communications services stocks in the Standard & Poor’s 500 are up more than 30 percent this year to date. Consumer discretionary stocks are up this year as well — by around 18 percent — but all of the other eight S&P 500 sectors are down. Stocks in the energy sector are collectively down more than 10 percent…

“What is the hyper-narrow stock market advance telling us about prospects for the economy, and should we pay attention? I can tell a pessimistic story and an optimistic story, but I’m going to lean into the optimism… The pessimistic take is that it’s unhealthy for a market — and an economy — when all the good news is concentrated in a handful of sectors. ‘It can reflect overcrowding in one area and uncertainty around the broader economy in others,’ Mona Mahajan, a senior investment strategist at the brokerage firm Edward Jones, wrote last week…

“[But then, the rise of AI may become a huge overall economic driver] “Early adopters are finding clever uses for A.I. tools such as ChatGPT, including memo drafting, language translation, software code generation and debugging. Deutsche Bank strategists recently compared A.I. to automobiles, which created new jobs in not just auto production but dealerships, road construction, tourism and the development of the suburbs… I think the narrowness of the stock market’s rise — so heavily driven by a handful of tech giants — isn’t the problem that many strategists make it out to be. ‘Investor exuberance has some solid foundations,’ [JoAnne Feeney, a portfolio manager at Advisors Capital Management in Ridgewood, N.J.] wrote. I think she’s right.”

One of the great drivers of doubt is the seemingly never-ending rise in the price of… well… most everything, with effective variations in between. Republicans blame spendthrift government but are quite willing to raise defense costs and cut social benefits without the obvious necessity of raising taxes to parallel our spending efforts. They even cut the corporate tax rate by 14 percentage points, going in precisely the opposite direction. Dems point to corporate profiteering, supply-chain disruptions and the Ukraine war, which seem to be a global inflation driver. Nevertheless, seeming to take advantage of a consumer expectation of rising prices, a vast array of companies is more than willing to meet those expectations… and can clearly get away without consequences.

“Companies like Pepsi have realized that they have more pricing power than they thought they did, and they’re taking advantage of it. These companies raised prices in 2021 because of higher anticipated costs—when they saw that it didn’t hurt consumer demand for their products, they raised prices again. And when that didn’t hurt revenues or profits, they raised them again.

“These companies have been able to do this because they are not what economists call price-takers, operating in a world where the price is set by the market, and companies simply supply as much as they can at the market price. Instead, they’re pricemakers: They have to decide how much to charge for their products. And price setting in the real world is a complicated process, reflecting costs, the potential impact of price on long-run consumer demand, how competitors might react, and so on. While elaborate computer models and forecasting techniques help, pricing is still ultimately art rather than science. And those models seem to have underestimated how much customers would be willing to pay for, say, a 12-pack of Pepsi.

“You can see that in the recurrence of the word ‘elasticity’ on the earnings calls of consumer-products companies. The more elastic consumer demand is (or the higher its elasticity), the more price-sensitive consumers are, and the more likely they are to buy less or switch to a different product. Low elasticity, by contrast, means that price increases have only a small impact on demand. And back in 2021, Pepsi’s CEO, Ramon Laguarta, said, ‘What we’re seeing across the world is much lower elasticity on pricing than we’ve seen historically.’ Companies could raise prices and customers would not flee.

“Now, 2021 was an unusual situation: The job market was rebounding and consumers were flush with cash because of stimulus payments and because they’d spent so little in 2020 on things like travel, entertainment, and eating out. But the striking thing is that, even as those effects have faded, consumers have stayed relatively price-insensitive. Of course, we all complain about the cost of living. But most Americans just keep spending. And so, in its most recent earnings call, Pepsi’s CEO said, ‘Elasticities are still holding up quite well across the globe.’” Surowiecki

In the end, prices rise in large part because we let them. Were miserable, because we are not sure about much. We accept that misery while others resort to populism to find blame or an AR-15 to impose “solutions” that rabble-rousers have pledged “if only….” It’s complicated, but if you want to get more basic, decrease demand and let suppliers struggle with the consequences! Just say “no” to spending as usual!

I’m Peter Dekom, and in these complex times, consumers can vote with their dollars as much as they can vote via the ballot box.