Perception Versus Reality

Why everyone has a different opinion on the economy

Recently, people's perceptions of the economy aren't matching up with how economists talk about the economy. According to a new CBS News poll, 33% of respondents believe the economy is in a recession, even though GDP grew 5% last quarter. This disconnect isn't surprising. The economy is complex, probably more complex now than it's ever been in history, so it's difficult to come up with one unified description of what's going on. People are going to have different perspectives that lead them to different conclusions (see this post on writing about the economy from multiple perspectives.)

Pretend the economy is the room pictured below. Someone looking into the room from the left window would see a child-sized bed, a small bookcase, and cartoon wallpaper. If you asked someone looking in from the left window what the room is used for, they would say it is a children's bedroom. However, someone looking into the room from the window on the right wouldn't see the wallpaper, the bookcase, or the bed. From the right window, they could only see the cardboard box and measuring tape. So, the person looking in from the right window would conclude that the room is empty, and perhaps the residents are still moving in, which would explain the box and measuring tape.

Perhaps in reality, it is both a children's room and the family hasn't fully moved in yet. Maybe mom still has plans to set up a desk so she can use the room as an office while her kid is at school. Both descriptions of the room matter; both are valid, and both can tell us something about the people who utilize the room. But you need some kind of theory about how people use rooms in a house to integrate both perspectives into a unified description of the room's use.

So, it's easy to see how two people might give two entirely different but equally valid descriptions of the room. Similarly, two people might give two entirely different descriptions of the economy. One person might see an economy booming with activity: employment is strong, and people are spending money. And another person might see an economy that is challenging: everything seems to cost more than it did pre-pandemic. And both descriptions can be accurate. 

Economists attempt to reconcile these different perspectives. We take different data points, anecdotes, and observations of the economy and combine that information with our theories about how the economy works to develop a unified description of the economy.

This is why a diversity of perspectives is needed in the economics profession. You need people to interject and say: "Your theory of the economy doesn't explain this perspective that you haven't paid attention to before." And the incumbent economists must humbly take those criticisms instead of dismissing them as purely anecdotal. That's how economics theories get better and how we advance our understanding of the economy. 

Media Round-Up

Yahoo Finance interviewed me about housing affordability in 2024.

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• New York Post: America is running out of home-owners insurance

  • “More than 20% of pending homes sales fell through in September in places like Orlando, Fort Lauderdale, Dallas and San Antonio, according to Redfin. It’s not coincidental that those cities are in states — Florida and Texas — with some of the highest insurance costs, Daryl Fairweather, the brokerage’s chief economist, said.”

• USA Today: Housing market predictions: Six experts weigh in on the real estate outlook in 2024

  • “Mortgage rates are likely to remain well above pandemic-era record lows because financial markets increasingly believe the country will avoid a recession in 2024,” says Redfin Chief Economist Daryl Fairweather. “Mortgage rates will fall to about 6.6% by the end of 2024. The gradual decline in rates combined with the small dip in prices will bring homebuyers some much-needed relief.”