Hope Floats

Americans appear to be increasingly optimistic about the economy, despite threats both at home and abroad. Are they irrational, or prescient?

A shopper leaves Costco with a cart full of goods on Tuesday, March 27, 2012, in Portland, Ore. Americans are holding onto a rosier view of the U.S. economy as they focus on the good in a flood of mixed economic news. 
Add to Briefcase
Catherine Hollander
Sept. 27, 2012, noon

This fall, eco­nom­ic doom and gloom would seem to be lurk­ing just around the corner.

It’s em­bod­ied in fears of fal­lout from the euro­zone sov­er­eign-debt crisis spread­ing across the At­lantic and the pos­sib­il­ity that U.S. law­makers might not strike a deal dur­ing the lame-duck ses­sion of Con­gress to pre­vent the coun­try from fa­cing an ab­rupt com­bin­a­tion of tax hikes and spend­ing cuts, the so-called fisc­al cliff.

In terms of the eco­nomy’s per­form­ance, the story of the last few months isn’t great, either. Payroll growth has av­er­aged few­er than 100,000 jobs — roughly the amount needed to simply keep pace with pop­u­la­tion growth — for the past five months. The Fed­er­al Re­serve Board is so wor­ried about the an­em­ic jobs mar­ket that it em­barked on a con­tro­ver­sial new round of bond-buy­ing earli­er this month.

Yet des­pite the lackluster em­ploy­ment pic­ture and the risk of a big hit to growth from ex­pir­ing tax cuts and auto­mat­ic spend­ing cuts, con­sumers are feel­ing more op­tim­ist­ic. Just this week, the Con­fer­ence Board’s Con­sumer Con­fid­ence In­dex hit a sev­en-month high. A pre­lim­in­ary read­ing of the Thom­son Re­u­ters/Uni­versity of Michigan In­dex of Con­sumer Sen­ti­ment for Septem­ber shows it climb­ing to its highest level in four months. After plunging last sum­mer amid the debt-lim­it stan­doff, the trend for con­fid­ence has been up­ward and on­ward. Why?

Ross De­Vol, chief re­search of­ficer at the Santa Mon­ica, Cal­if.-based Milken In­sti­tute, has a simple an­swer: stock prices. They are the single most im­port­ant factor for month-to-month changes in con­fid­ence. Re­cent signs that the hous­ing mar­ket has sta­bil­ized also play a key role, as homes are a ma­jor source of house­hold wealth.

“This is kind of the “˜wealth ef­fect’ on con­sumer con­fid­ence, and I think is the prin­cip­al reas­on why con­fid­ence has re­boun­ded more than you might think in the middle of a euro­zone crisis and all the un­cer­tainty sur­round­ing that, the do­mest­ic fisc­al cliff,” De­Vol said.

As of this writ­ing, the S&P 500 is up more than 25 per­cent from last Septem­ber. By in­ject­ing cash in­to the eco­nomy, the Fed’s bond-buy­ing has helped drive up stock prices, boost­ing the con­fid­ence num­bers. “There’s more li­quid­ity in the mar­ket, and equity mar­kets love that,” De­Vol said.

Amna Asaf, a Toronto-based eco­nom­ist at Cap­it­al Eco­nom­ics, cites gas­ol­ine as well as equity prices as cru­cial de­term­in­ants of con­fid­ence. As equity prices have climbed, gas prices have been re­l­at­ively stable over the past year, rising just 6 per­cent on a sea­son­ally ad­jus­ted basis, Asaf says, help­ing to ac­count for the rise in con­fid­ence.

Al­though Wash­ing­ton is trans­fixed by the loom­ing fisc­al cliff and the fear that the eco­nomy will plunge over the edge, few Amer­ic­ans are pay­ing at­ten­tion to that right now. The im­pact on con­sumer psy­cho­logy prob­ably won’t show up un­til Novem­ber and Decem­ber, after the elec­tion gives way to a dis­cus­sion about the coun­try’s fisc­al fu­ture. “My guess is, we’re go­ing to have to get a lot closer and it’s go­ing to have to look a lot more omin­ous,” said Dean Baker, co­dir­ect­or of the Cen­ter for Eco­nom­ic and Policy Re­search.

CEOs, who are already factor­ing the im­pend­ing — and sure to be ugly — tax de­bate in­to their fore­casts, were much more pess­im­ist­ic about the fu­ture. The Busi­ness Roundtable’s third-quarter CEO Eco­nom­ic Out­look Sur­vey, re­leased this week, de­clined from 89.1 in the second quarter to 66.0 in the third. The down­shift, ac­cord­ing to Roundtable Chair­man Jim McNer­ney, partly re­flects un­cer­tainty sur­round­ing the fisc­al cliff. Con­sumers, who aren’t yet pon­der­ing taxmaggedon, have high­er hopes for the fu­ture: The Con­fer­ence Board’s ex­pect­a­tions in­dex climbed from 71.1 in Au­gust to 83.7 in Septem­ber.

Eco­nom­ists track the con­fid­ence num­bers, and the ex­pect­a­tions in­dex in par­tic­u­lar, for signs of wheth­er con­sumers are likely to open their wal­lets and help power the eco­nomy or stash their money away. Where they dis­agree is how ac­cur­ate those num­bers are as gauges of fu­ture spend­ing.  

Marta Lachow­ska, an eco­nom­ist at the W.E. Up­john In­sti­tute for Em­ploy­ment Re­search in Kala­ma­zoo, Mich., wrote a pa­per last sum­mer ask­ing, “What Do In­dexes of Con­sumer Con­fid­ence Tell Us?” She con­cluded that con­fid­ence likely does fore­cast changes in con­sumer spend­ing by bring­ing to­geth­er in­form­a­tion that mat­ters to con­sumers but isn’t in­de­pend­ently ob­serv­able by eco­nom­ists.

De­Vol says he has seen the pre­dict­ive power of the in­dexes de­cline over time. Quirks in how the sur­veys are put to­geth­er have caused them to weight middle- and lower-in­come house­holds more heav­ily in pro­por­tion to the broad­er pop­u­la­tion. But he still finds it use­ful to look at con­sumer re­sponses to ques­tions about wheth­er they will buy big-tick­et items such as cars and ap­pli­ances. “I think those are bet­ter in­dic­at­ors of what con­sumers are go­ing to do than over­all weight­ing all the vari­ous factors,” he said.

CE­PR’s Baker, however, says that the gauges are more use­ful as a snap­shot of at­ti­tudes today than what will hap­pen next month. Both the Con­fer­ence Board and the Thom­son Re­u­ters/Uni­versity of Michigan in­dexes have three com­pon­ents: a head­line com­pos­ite num­ber — the one that the press fo­cuses on each month — and meas­ures of con­sumer at­ti­tudes about cur­rent eco­nom­ic con­di­tions as well as their fu­ture ex­pect­a­tions.

“Cur­rent con­di­tions tend to be [a] reas­on­ably good … in­dic­at­or of what’s go­ing on today,” Baker said. Fu­ture ex­pect­a­tions, on the oth­er hand, are more volat­ile, even though ac­tu­al con­sump­tion tends to be stable, sug­gest­ing that the meas­ures of ex­pect­a­tions are not the best gauge of what’s to come, he said.

Today, the Con­fer­ence Board’s com­pos­ite con­fid­ence read­ing is 70.3, well be­low 90, the level as­so­ci­ated with a healthy eco­nomy. And it’s far be­low 111.9, the peak reached in the sum­mer of 2007. With threats loom­ing at home and abroad, that sky-high level of ex­uber­ance isn’t likely to re­turn any­time soon.


Welcome to National Journal!

You are currently accessing National Journal from IP access. Please login to access this feature. If you have any questions, please contact your Dedicated Advisor.