The Economy vs Your Experience: Why Economic Growth ≠ Financial Prosperity

The economy is strong (at least that's what the economic data says), but people are not feeling it. There is a disconnect between how countries, overall, are faring and how (most) individuals feel about their financial standing.

Let's focus on the US.

• unemployment is at record lows
• real GDP and GDP per capita are higher than 2019
• the "guaranteed recession" of 2023 never came
• many sources claimed that the reason the US managed to escape a recession in 2023 was because "the consumer" was more resilient than expected

Yet, consumer sentiment (i.e. how US consumers feel about their personal finances) has still not recovered to where it was in 2019 and even sank to 6-month lows in May.

How is "the consumer" so resilient yet consumer sentiment is so low?

To paraphrase the icon, Whitney Houston,

How is the economy so strong if consumers feel so weak?

"This love is strong, why do I feel weak?" - Whitney Houston, How will I know

Reason 1: Wealth Inequality

If Bill Gates walks into a bar, the average net worth of the bar would skyrocket to several billions (or a few hundred million depending on the number of people at the bar). But has the economic reality for the average person in that bar changed? No.

There are broadly 2 main economic experiences:

1. The experience of owners of real and financial assets
2. The experience of the working class

Broadly speaking, homeowners and owners of financial assets have done very well over the last few decades (maybe century) as asset prices have risen. Even in the higher interest rate environment we're currently in, the S&P 500 (the index that tracks the 500 largest US companies) is close to all-time highs.

While that segment of the US population is largely better off, the 2nd segment is experiencing a completely different reality.

The combination of higher interest rates and inflation has hit (predominantly non-asset-owning) working-class Americans really hard. Many of these households have exhausted their savings and maxed out credit cards to make ends meet. This is evidenced by rising credit card delinquency rates and record-high credit card debt balances in the US.

While there is no clear distinction of the number of Americans that fall into either group and while there is bound to be overlap between the 2 groups (e.g. people who own their home on a mortgage and don't have enough cash to meet current financial obligations); estimates agree that decent chunk of Americans fall into the non-asset-owning group.

Going back to the 4 factors of production: Land, Labour, capital and entrepreneurship.

In simple terms, over the last few decades, the value of all factors of production except labour has grown exponentially while the value of labour has remained the same. While the economy is growing, those whose primary source of wealth is their labour have received little share of that economic growth.

Case in point: this report by Self found that people in their 20s and 30s today are earning less than their parents' generation after adjusting for inflation, but they are also carrying larger student loan balances.

In summary: The spoils of economic growth have been enjoyed by the few (asset owners) not the many. For how much longer can this continue? How sustainable is this?

Reason 2: Definition Problem

In a world of staggering wealth inequality, GDP may not be a complete way to represent individual experiences in aggregate data. Remember the case of Bill Gates and the bar.

Perhaps we're not measuring economic prosperity properly. Because if economic prosperity for the few can mask difficulty for a lot, then how can we broadly claim to be prosperous?

While we're not in a recession, this feels like a “vibecession.” - Term coined by Joyce Chang, JPMorgan’s chair of global research

The government of Bhutan takes a different approach by measuring Gross National Happiness. The Gross National Happiness (GNH) Index was formally adopted as a development indicator in Bhutan’s 2008 Constitution and up until last year, Bhutan’s tourism slogan was “Happiness is a Place.”

Reason 2.5 or 3: Macroeconomics vs microeconomics

One of my favourite things to do is observe microeconomic theory in real life. And this may show how much of a nerd I can be (sometimes). At the local farmer's market, I frequent, there are several sellers of the same good. In real-time, I observe demand and supply interact to drive price. I see how the sellers with the lowest price see a flood of demand and those with the highest price are left untouched till they cut down their price to match the market.

It's so fascinating to observe.

Macroeconomics is quite different. It has to do with much broader factors that can't always be felt directly. While wealth inequality has numbed the ability of average (non-asset owning) people to feel economic prosperity, macroeconomics by design may not always be felt by individuals.

Final Thoughts

In summary, why isn't broader economic growth feeding to the average person? Wealth inequality and the law of averages. To make economic growth more representative, either reduce wealth inequality or focus on more equitable definitions of broader economic growth like Bhutan is trying to do.

In other news...

After laughing at Sam Bankman Fried (SBF) over FTX's collapse in 2022, it appears that top SBF rival, Changpeng Zhao (CZ), founder of Binance, will serve 4 months in prison after pleading guilty to violating laws against money laundering. While CZ's 4 months is not as much as SBF's 25 years, the crypto world has an interesting way of turning visionaries into convicts.

CZ has now won the crown of the richest person ever to do time in US federal prison. If you're going to do something, you might as well be the richest person to do it right?

CZ stepped down as Binance's CEO last November when he and the crypto exchange admitted to the violations.