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Phil Gramm recently stepped down from his post as one of John McCain’s top economic advisors after sparking outrage by saying that America is currently undergoing a "mental recession" and had become "a nation of whiners."
To some extent, we at AIER would disagree with the former senator. Our measures of the business cycle have given somewhat negative, though certainly mixed, signals regarding the health of the economy. However, measures of consumer sentiment alone seem to indicate that the country is in the midst of the worst recession since 1980. Back then, the unemployment rate was 7.5 percent and real GDP shrank at an annualized rate of 7.8 percent. However, the current situation, by comparison is not nearly so bad.
Unemployment rose slightly this month to 5.7 percent while GDP has increased for the past two quarters. GDP did decrease in the final quarter of 2007, but by a relatively small -0.2 percent.. The Index of Consumer Sentiment, as measured by the University of Michigan, was 56.4 in June 2008, the lowest measure since the index fell to 51.6 in May 1980. Today this index is even lower than it was in 1982, a year in which unemployment reached 10.8 percent. While it would be difficult to say that many of the woes affecting Americans today are imaginary, it does seem possible that the prevailing pessimism is overblown. One possible explanation is in the price of a gallon of gasoline, the average price of which has risen, in inflation-adjusted terms, to an all-time high. The previous peak was in 1980, while the adjusted price fell throughout the 1982 recession. In the short term, demand for gasoline is highly inelastic, meaning that people do not adjust their consumption much in response to price increases. Much of the gloom may be attributable to resentment over the doubling of nominal gas prices in the last year rather than indicative of an overall economic malaise. As can be seen in the chart, the change in consumer sentiment closely mirrors the changes in gas prices. In the past few weeks, crude oil prices have fallen to three month lows. Can we expect to see a rebound in consumer sentiment? 
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