Thread by @quantian1

Since it's Sunday and I'm bored, I figured I would finally, definitively answer the question of "why do people think the economic is bad (and is that the case?)". This is because it is easy to answer, and the answer is funny and will make many people mad.

https://twitter.com/whstancil/status/1687867023353958400

First of all, we will ignore everyone on Twitter and look at objective data, in this case the University of Michigan's consumer survey asking what people think economic conditions are. Spoiler: People think the economy is very bad, worse than any time other than 1980 and 2008!

Ok, now let's think of all the variables that might cause them to think that and build a model. I picked the following:
Inflation rate
Inflation rate change
Unemployment
Unemployment change
Housing prices
Real wages
Dollar strength
Interest rates
Stock prices
and went from there

Now, let's build a simple linear model to predict confidence from those 9 variables, but only fit it from 1978-2019, excluding COVID. The R^2 is *very* good- 87%- and the p-value is essentially 0, so consumer vibes can be almost perfectly be explained by objective data. Great!

(The results line up with what you'd expect, with a few surprises: people really want low levels of inflation, low unemployment, rising asset prices, high interest rates, etc. Two surprises: there's a slight preference for rising inflation, and real wages don't matter at all.)

Now, let's extend that chart above to include COVID. Same model as above. Oops! Now it's wildly wrong. Consumers should think the economy is really good (105-ish), *if they cared about the same things they did from 1979-2019*, which they don't. Economists HATE inconsistency!

So let's re-estimate the model, then, and figure out what changed. The answer is that three major things changed: consumers care a lot less about unemployment than they did, prefer housing prices to fall rather than rise now, and, more than anything else, HATE high interest rates

This third effect completely dominates everything else, and explains 104% of the 29-point gap between the model and current levels. The other effects largely offset each other, but that one is THE huge outlier.

So, the clear-cut, data-backed, but-for reason why Biden is unpopular is because Jerome Powell is making people's mortgage rates go up, and they're not happy about it. This may surprise you, but it really shouldn't: Americans LOVE borrowing money, and HATE being told they can't.

You could probably tell a of story about how America is now a deeply levered shitco that doesn't care about income as long as change in net cash stays positive, but like 500000 people have done that already and I need to get back to to work to pay off my credit cards now. THE END

(One quick robustness check here, before people complain about break points: if you fit your model *only on data from the 1980's*, it's still able to predict the next three decades almost perfectly. There really was a structural break, and it really did happen during COVID)

Two postscripts:
1. Some people say that data wildly diverging after the fitting period means it's overfit. It's not, you can train on much smaller portions (~12%) of the pre-2020 data and get the same fit and divergence. There is a structural break in 2020.

2. Other people make the (better) complaint about multicollinearity in the data. If you LASSO the variables instead of using OLS, you still see very similar results: housing flips negative, inflation becomes more salient, unemployment less salient, rate hikes hugely salient.

@profplum99 did a similar analysis with his own preferred set of variables and reached a similar conclusion that housing price and mortgage spreads are major drivers, with the CPI <> Unemployment salience flipped as well

https://twitter.com/profplum99/status/1688558222506917888