Weekly Wrap Up: The Biggest Econ Question; Sec'y Bessent's Unusual Comms Strategy; Growth Models

It's been a week...again.

The most important current-events-econ question right now…

…is “if and when will the terrible soft data catch up to the good hard data?”

If you’re someone who follows economic current events, you might believe the economy is tanking. Markets are down sharply (even with Friday’s melt up), recession probabilities have doubled (roughly from 15 to 30 percent), and consumer and business sentiment are tanking.

But that’s mostly so-called “soft” data and the “hard” data—jobs, inflation, GDP—all of which, to be clear, lag the soft data, are still doing pretty well. Some hard lights are flashing yellow: hiring has slowed, and DOGE-induced federal layoffs have spiked. But economy-wide layoffs are still low, and at least as of February the unemployment rate (4.1%) and job gains (200K/month on average over the past three months) are solid, supporting real wage gains that in turn support the 68% of GDP that is consumer spending (more on that below).

Here's the figure to think about right now (with thanks to SIEPR’s Ryan Cummings):

It shows the actual UMich consumer sentiment results against a predicted value based on unemployment, spending, the stock market, and inflation (we haven’t updated yet to the latest big-drop data point, but will do ASAP). The point is that soft and hard indicators used to correlate but COVID killed that correlation. However, even while predicted sentiment is hanging out well above actual sentiment, the two lines are roughly moving in the same direction.

Which is why I worry that unless team Trump stops doubling down on pretty much every deeply unpopular part of their economic agenda, the bad soft data may soon, as in months, start catching up to better hard data.

Secretary Bessent’s Highly Unusual Lemonade Brew

Treasury Sec’y Scott Bessent continues to pursue a quite interesting communications strategy around the higher-consumer-prices problem generated by the Trump tariffs. Instead of the initial admin strategy of denying, against all evidence, that these import taxes would be passed forward to American consumers, they’ve shifted to arguing that people care more about…I’m not exactly sure what…than about lower prices.

As he put it this morning, “”The American dream is not, ‘let them eat flat screens’ ... the American dream is not contingent on cheap [stuff] from China.” He then goes on to say the American dream is about affordability, home prices, mortgages, higher real wages, upward mobility.

This seems deeply misguided on many levels. First, it’s…um…off-putting for people whose net worth is $500 million to tell folks that they should aspire to more than lower prices. I mean, they should and they do—we all like a bargain but none of us walk around thinking our big goal in life is to pay less. Those goals are invariably more spiritual than material, or least more of a combo.

But material goals matter a lot too, and he knows tariffs push the wrong way. They reduce affordability by raising prices. That puts upward pressure on interest and mortgage rates. In fact, a highly under-appreciated downside from tariffs is the extent to which they raise costs for home builders. One estimate is that the tariffs could “add anywhere from $7,500 to $10,000 to the cost of building the average American family home.”

Higher inflation leads to lower real wages, and there’s zero evidence that tariffs, be they sweeping or narrow, do anything for upward mobility.

Therefore, I’m pretty sure all he’s doing here is trying to make lemonade out of the lemon of their trade policies and doing so by appealing to people’s higher aspirations. That would be admirable if there was anything in their agenda that might help folks get closer to either of their material or non-material aspirations, but instead all we’re getting is divisiveness, hatred of differences, threats of constitutional crises, incompetent DOGEballs recklessly tossed by incompetent unelecteds, and global isolationism built on false foundations.

They’re constantly telling us that the pain they’re doling out will be worth it for the gain on the other side. But there’s zero effort and even less—i.e., negative—evidence to convince us that the pain is worth the gain.

The Biden Growth Model vs. the Trump Growth Model

I grant you that this is a bigger topic than belongs in a weekly wrap-up, but it’s been on my mind and relates closely to the first entry above. Simplifying considerably, the growth model many of us had in our heads in Biden-econ world was based on the fact that a persistently strong labor market is foundational for a strong and equitable expansion. Low unemployment, especially if combined with union power, raises the bargaining clout of workers, enabling them to claim a fairer slice of the growing pie. This, in turn, supports solid consumer spending, and that, in turn, helps to boost investors’ animal spirits.

There was a lot more to it—that’s all macro and of course there were many micro components, like the poverty-reducing Child Tax Credit, health-care premium subsidies that lowered the uninsured rate, and of course industrial policy to incent investment in key sectors.

But especially given the U.S. economy’s 68% consumer spending share (that’s 55% in Europe; 45% in China), the worker-centered-growth model was, and remains, largely responsible for the good “hard” data trends discussed above.

The Trump growth model is, unsurprisingly, a lot harder to pin down (and I, for one, think the so-called Mar-a-Lago Accord is backfilling chaos with imagined order) as so much of their economic activity—I’m thinking tariffs, DOGE, high-end tax cuts—is based on some combination of retribution, sticking it to their enemies and our trading partners, reversing Biden programs, and rewarding donors with tax cuts and crypto reserves. It’s a lot more focused on upward distribution, shrinking government, international isolationism, than growth.

But in the meantime, they’re happy to ride the results of the growth chain: strong labor market==>consumer spending==>solid investment—they inherited. The problem is—again, referencing entry one above—I fear they’re squandering their inheritance, much as they did by mishandling COVID in their first go-round.