There are plenty of reasons for economic optimism

There is a paradox emerging related to the economy. Individuals and businesses report feeling bad about the economy, but they are still spending and making new investments. We call this divide between how consumers say they feel about the economy (bad) and how they’re acting (still spending) second-hand pessimism.

The effects of secondhand pessimism are quite significant. It can worsen economic downturns by leading to reduced consumer confidence and spending, which in turn slows down economic activity. When people think that the economy is doing poorly or that future economic conditions will worsen, they are more likely to reduce their spending and increase their savings as a precautionary measure. This behavior can create a cycle where lower consumer demand leads to decreased business revenues and further economic decline.

In 2023, despite facing many challenges, US consumer spending remained strong. However, this trend has started to weaken in 2024. Real retail sales growth is slowing down and consumer confidence has been declining for several months. The increase in real disposable personal income is also slowing, as the savings accumulated during the pandemic are being used up, and household debt is growing rapidly. More of consumers' income is now being used to pay off debt, and delinquencies on auto loans and credit cards are increasing rapidly. Despite these concerns, the stock market and travel spending are at almost record high levels, unemployment is low, and wage growth exceeds inflation levels.

Overall consumer spending growth is expected to slow in Q2 and Q3 2024 as households struggle to find a new balance between income, debt, savings, and spending. So, who is driving this trend? Interestingly, Bank of America credit card data shows that travel spending remains strong across all income levels, and lower-income consumers (annual household income <$50k) have shown the strongest spending growth compared to 2019. In many respects, this isn’t surprising: the May Consumer Checkpoint discussed the still positive overall fundamentals of that group, including relatively strong after-tax wages and salary growth, and continued savings

This low-income consumer isn’t our target market in Eagle County, but the data shows the strength and impact of secondhand pessimism – you’d never guess this is the truth by watching the news. Discretionary travel spending remains at historically strong levels, yet individuals adopt a negative outlook on the economy based on the pessimistic attitudes and opinions of others rather than their direct experiences or objective data. This can occur through various channels, such as media reports, social networks, or conversations with family and friends.

The concept of secondhand pessimism is essentially a form of social contagion. It means that individuals' economic outlook is affected by the attitudes of those around them, causing them to see more economic risk and uncertainty. This effect can be especially strong during times of market instability or in election years when negative news and feelings are widespread. Despite people reporting pessimism about the economy, the economic data does not support this idea.

Understanding secondhand pessimism requires acknowledging the role of psychological and social factors in economic decision-making and the fact widespread pessimism is based more on social contagion than on economic fundamentals.

Traditional economic models often assume rational behavior based on individual utility maximization, yet the influence of secondhand pessimism highlights the importance of considering how information dissemination and social interactions shape economic perceptions and actions. Despite the secondhand pessimism related to the economy, I remain optimistic about our prospects and the overall health of our business community as the economic data points around travel spending and the economy remain resoundingly positive.

Chris Romer is president & CEO of Vail Valley Partnership, the regional chamber of commerce. Learn more at VailValleyPartnership.com