The U.S. economy is showing resilience and inflation is coming down, but most Americans will tell you that the economy is in terrible shape. To use a term from a bygone era, welcome to the “bad vibes” economy.

Negative reporting about the economy on partisan news channels can account for at least part of the disconnect. Pessimism is being fueled by a steady drumbeat, night after night, about how the economy is going to hell in a handbasket. This carping is contradicted by much of the hard data, but it’s easy to sway the uninformed.

Take a look at Gallup’s latest Economic Confidence Index, with data as of October:

The index summarizes Americans’ assessments of current economic conditions and their opinion of whether the economy is getting better or worse. The index has a potential range of -100 to +100.

Meanwhile, the Conference Board Consumer Confidence Index decreased in November after also dipping in October. The Index now stands at 100.2, down from 102.2 in October.

On Friday, we got evidence that maybe…just maybe…consumers are starting to smell the roses. The widely followed University of Michigan Consumer Sentiment Index was released and it bodes well for consumer behavior (and by extension the economy and stock market) in early 2023. The index increased in early December; here’s a snapshot:

To quote my favorite band, The Beatles: “I’ve got to admit it’s getting better, a little better all the time…”

Stocks finished Thursday in the green, as investors embraced risk-on assets due to data showing that supply chain disruptions are easing and distribution costs are falling. What’s more, used car prices are below their levels at the beginning of the year.

These sanguine inflation numbers come on top of strong jobs growth and improving activity levels for the services sector. Nonetheless, U.S. stocks took a breather Friday and closed lower as follows:

• DJIA: -0.90%
• S&P 500: -0.73%
• NASDAQ: -0.70%
• Russell 2000: -1.19%

WATCH THIS VIDEO: Economic Crosscurrents, Explained

The good news on inflation was underscored by the latest producer price index (PPI). The U.S. Bureau of Labor Statistics (BLS) on Friday released the PPI for November. The PPI climbed 7.4% in November versus a year earlier. That’s down from the revised 8.1% gain reported for October (see the chart for a breakdown of the PPI’s components for November):

Sources: BLS, Bloomberg

Extricating volatile food and energy prices from the PPI reading, prices rose 6.2% for the year ending in November, down from the revised 6.8% increase the previous month. The consensus had called for only a 5.9% increase.

Because the PPI measures wholesale price changes before they reach consumers, many analysts view the PPI as an earlier predictor of inflation than the more popularly followed consumer price index (CPI).

Another reason for optimism is China’s relaxation of strict COVID lockdown measures due to public protests. Chinese equities have moved sharply higher this week, on Beijing’s pandemic policy compromises.

The paradoxical economy…

Many aspects of the economy are vibrant, but average folks feel lousy about conditions anyway. Regardless, consumers as a whole are still spending in defiance of inflation and even their own pessimism. To be sure, the spending emphasis has evolved, moving away from goods and back toward services. We’re also seeing greater spending on discount items and less on pricier discretionary items.

But still, those wallets are open, and Friday’s University of Michigan positive Consumer Sentiment reading suggests that they’ll stay open. Perceptions are catching up with reality.

As the holiday shopping season gathers steam, sales on Cyber Monday, which follows Thanksgiving, broke records. Online sales on Black Friday smashed records, too. Jobs growth remains strong and wages are rising, contributing to a wealth effect among shoppers.

Does the widespread fear of recession mean you should avoid growth stocks altogether? Not by a long shot.

You can still find reasonably valued growth stocks that are poised for outsized gains in 2023. The key is to focus on strong financial metrics that include low debt, robust free cash flow, and positive projected earnings growth. It’s also important that these companies provide products and services that customers will need well into the future.

Case in point: Many large-cap technology stocks have gotten clobbered, due to rising interest rates. These tech leaders now trade at rare bargain levels. Over the long haul, their market dominance and innovation will put them back on top. You should consider incrementally increasing your exposure to the tech stalwarts on your wish list that had become too pricey.

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