Trump's election changed how Americans feel about the economy
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It's generally a rare thing for the person you're interviewing to burst out laughing. But that's what happened to me, recently, on a call with Ernie Tedeschi, the director of economics at the Yale Budget Lab who in March wrapped up a three-year stint on the White House Council of Economic Advisers. The question that evidently tickled Tedeschi: Was the "vibecession" fake? The vibes around the economy — as in, the way consumers and businesses say they feel about it — have been changing lately, and not because the economy itself is markedly different from how it was in the recent past. Inflation is down from its peak, but it's up a bit from where it was earlier this year. The labor market is still strong, and consumer spending is still solid.
Despite the relatively steady environment, people are feeling a whole lot more enthusiastic. In November, small-business sentiment reached its highest level since June 2021, surveys for the National Federation of Independent Business' optimism index found. The number of business owners who said they expected the economy to improve and thought it's a good time to expand increased significantly. Corporate executives' expectations soared for the fourth quarter, the Business Roundtable's economic-outlook survey found. CEO forecasts for hiring, capital investment, and sales improved.
Consumer sentiment has been on the upward slope for multiple months, surveys from the University of Michigan found, and it is continuing that trend heading into the end of the year. Underneath the top-line number, however, there's been a significant partisan shift. Republicans' expectations around the economy improved in December, while Democrats' got worse. It's part of a trend in economic sentiment: People feel a lot better about the economy and their prospects when the political party they support is in charge. So I wanted to know, was Americans' deep sense of economic pessimism over the past year — and the recent turnaround — just a politically driven mirage?
After the embarrassing-for-me chuckle, Tedeschi responded. "The short answer is no. The vibecession was not fake. The long answer is no, but … ," he said. Perceptions of the economy have to do with more than the economy itself. That doesn't mean that people were lying or that their answers didn't have some real economic motivation, but there's clearly more to it than the material conditions in front of them — it's also about their ideological leanings and how that shapes what they believe is ahead.
"Perceptions of the economy are definitely deeply partisan," Tedeschi said.
When people say the economy feels bad, they can mean a variety of things — prices are too high, the news they read is negative, the president is old. Feelings are not facts, including when it comes to GDP. Politics colors a lot of the way businesses and consumers say they see the world around them, including when it comes to money.
It's easy to say the shift in sentiment is partisan flag-waving — now that Donald Trump is headed to the White House, Republicans are going to say everything's great, and to the Democrats, it's all terrible. But that's not really what's happening, said Joanne Hsu, the director of consumer surveys at the University of Michigan. When people say their expectations are better or worse, it's not simply the outcome of the election they're responding to but the policies they believe are on the horizon.
"With the election of Trump, people have an idea of how economic policy might change over the next year and over the next four years. So people are expecting tariffs. They're expecting action on immigration," Hsu said. "The thing is that people across the population really disagree on whether or not these policy changes are a good thing or a bad thing for the economy."
Democrats are worried that Trump's threatened tariffs and promise to undertake mass-deportation efforts will make things pricier. Republicans, on the other hand, think that these policies will be good for the economy and that Trump will help bring down inflation. Independents, Hsu said, are in the middle.
The thing is that people across the population really disagree on whether or not these policy changes are a good thing or a bad thing for the economy.
To a large extent, it makes sense that small businesses and corporate executives feel sunnier about the future. The deregulation and tax cuts that are likely to result from a Trump presidency are music to the business community's ears.
"They're optimistic that policies that they like are going to get enacted over the next four years," Tedeschi said.
Businesses don't love the idea of tariffs, but many are hopeful that there are ways they can get around them or that the president-elect isn't so serious about them. Or they just plan to pass along any price increases to consumers anyway. (There may be some amount of denial going on among corporate executives and Wall Street investors, all of whom seem to be ignoring some of the potential downsides of Trump's policy promises and the instability he could represent.)
Overall, the response is fairly logical — if you think what's to come is good for you, you feel good about it. If you think it's not, the opposite.
Over the past couple of years, there have been a lot of efforts to explain the vibecession, the phenomenon where the economy, on paper, looks pretty good but consumers say it's terrible (even though in many cases, they say that they, personally, are doing just fine). No one has come up with a definite answer on what's going on, though high prices — even as inflation has cooled — are likely a big part of the equation. But the fact of the matter is that people are channeling a lot of things when they evaluate the economy, which is a nebulous concept to many people in the first place.
In a particularly polarized political environment like the one we're in right now, a person's red or blue stripes are inevitably going to influence their evaluations. As much as it may be policy-related, it is also partisan, and it's partisanship that's getting worse.
Hector Sandoval, the director of the Economic Analysis Program at the University of Florida, released a study in early 2024 looking at the impact of national elections on consumer sentiment and spending intentions. The research found a "significant boost to consumer morale" when a person's affiliated party won a presidential election. It also found that over the decades, the swings had become more pronounced.
People are spending as if they are much happier than they are.
"It actually became more extreme," Sandoval said. In 1992, when Bill Clinton was elected, there was some partisan change, but it's something one might "not really even bother" to note, he said. It happened in 2000 when George W. Bush was elected, but also to a relatively benign degree. "But then, I will say, 2008, 2016, 2020, especially 2016, those are where you are surprised how the gap is just becoming more and more," Sandoval said.
Michigan has been consistently asking its survey respondents about their political leanings monthly only since 2017, but Hsu said polarization had become increasingly evident in its data over the past 40 years. The gap was especially pronounced under the first Trump administration, she said.
Whether you think the economy is good, bad, or wherever in between, we can all probably agree the way that we measure people's feelings about the economy is a bit broken. It's no longer really possible to say, "XYZ economic data says this, so consumers will feel ABC." It's not clear whether this is a temporary pandemic-driven blip or a permanent shift in how people relate to the economic forces around them. What makes this even more complicated is what consumers say they feel isn't even reflected in what they do. Throughout these past years of turmoil, consumers have said everything is terrible and spent a bunch of money anyway. Many people's bank accounts, especially those in the middle- and upper-income brackets, are fine.
"People are spending as if they are much happier than they are," Tedeschi said. He added that this disconnect between the vibes and the data meant that when the vibes get better, it might not mean much, tangibly. "Even if consumer sentiment recovers, even if the vibecession goes away, it may mean that there's not much of an upside for the real economy," he said.
Economic sentiment is, of course, an economic indicator, but it's also a political indicator. In some respects, it might be a better guide as a poll of political job performance than for how people are actually doing financially. While the vibecession was not fake or some giant mirage, there's more going on beneath the surface. If you're a Republican, you're feeling real good about February. If you're a Democrat, enjoy the last of those good vibes now.
Emily Stewart is a senior correspondent at Business Insider, writing about business and the economy.