When Confidence Is Lower Than the Economy Itself

Distrust in government is at its highest level in recorded history. Americans are worried that the economy is cratering. Protesters in the Occupy movement are voicing the frustrations of an increasing number of people.

There is no question that these sentiments reflect a grim reality: the poverty level is up. Inequality has grown exponentially since the 1970s. The European debt crisis remains unresolved. Unemployment is stuck at 9 percent, and if you count the people who have either given up looking or those who have taken part-time jobs because they can’t find full-time work, close to one in six people is underemployed.

Yet by at least one measure, how people feel seems disconnected from how things are. Consumer confidence is back down to lows last seen during the depths of the Great Recession, despite the fact that the economy is still, believe it or not, growing.

On Thursday, the Commerce Department will announce its estimate for economic growth in the three months from July through September. The consensus is now for an annual rate of 2.5 percent. Although that’s certainly not enough to bring down the unemployment rate significantly or increase middle-class incomes, it does suggest that the economy is not currently on the cusp of a double-dip recession.

Yet consumer confidence, as measured by both the Conference Board and the University of Michigan/Reuters index, is down to lows last seen in the fourth quarter of 2008, when the economy actually contracted at an annual rate of 9 percent.

It’s possible that the dip in confidence is a precursor of an actual pullback in spending that would, in turn, push economic growth down. But for now, actual spending does not seem to reflect the gloom that people feel. Chain store sales are up, as are auto sales. Part of the reason car sales have risen is that the supply chain disruptions caused by the Japanese earthquake and tsunami have receded. But people still have to buy the cars that are being produced.

Cars are usually bought on credit, which means buyers are committing to a stream of payments into the future. The fact that consumers are purchasing autos, said Ben Herzon, senior economist at Macroeconomic Advisers, “suggests they are not feeling as glum as they are reporting.”

It is not unprecedented that consumers would feel much worse than they actually behave.

According to the Conference Board, people do take longer to recover from a recession than the official economic metrics, in part because companies do not tend to create a lot of jobs until they are sure that growth is going to last. “The labor market has a significant impact on confidence readings,” said Lynn Franco, director of the consumer research center at the Conference Board.

So between 1991 and 1994, confidence zigzagged up and down. Twice during 1992, a year after the recovery had begun, confidence dipped as low as it had been during the recession. And in early 2003, a year after growth had resumed following the 2001 recession, consumer confidence fell to a far lower level than it ever reached during the recession.

The gap between perception and economic growth this time around also has to do with jobs. Employers are simply not creating them fast enough to instill optimism. On top of that, political brinkmanship over the debt ceiling in Washington, the Standard & Poor’s downgrading of the United States credit rating in August, and vast swings in the stock market have rocked confidence.

In fact, stock market volatility may be playing a larger role in the consumer mind-set than it has in the past. After Black Monday in 1987, when the Dow fell more than 22 percent in one day, the University of Michigan/Reuters index of consumer expectations, which records how consumers feel about their economic futures, fell just 7.7 points, said Ian Shepherdson, chief United States economist at High Frequency Economics. Since May of this year, that index has fallen more than 20 points.

And let’s face it, even at 2.5 percent growth in gross domestic product, no one would call that firing on all cylinders. The amount of time it is taking to recover from the financial crisis is throwing everyone.

“This recession, followed by sluggish recovery, is not the experience of pretty much anyone today,” Mr. Shepherdson said. “So for all intents and purposes nobody in America has any experience for an economy behaving like this. Economists don’t even understand it.”

He added: “So if people don’t really understand what’s going on in the economy, how can they frame reasonable expectations of where it’s going?”

Worsening Attitudes

Americans have given their economy a vote of no confidence. Or at least, very little confidence.

CATHERINE RAMPELL

Dollars to doughnuts.

Gallup’s latest survey shows that Americans are considerably more pessimistic now than they were a year ago. Here’s a chart showing Gallup’s Economic Confidence Index for 2010 and 2011:

Dollars to doughnuts.

The index is based on daily interviews with 500 adults across the country, or about 3,500 people each week. Respondents are asked whether the economy is getting better or worse, and whether current economic conditions are “excellent,” “good,” “only fair” or “poor.” For each question, Gallup subtracts the percentage of people answering negatively from the percentage of people answering positively.

Then the two results are averaged to come up with a value that Gallup calls the Economic Confidence Index. A negative index value means that Americans are more pessimistic, and a positive value means they are more optimistic.

As you can see, the latest index measure was negative 49 (with a margin of error of 2 percentage points), compared to negative 29 a year ago.

Americans have been down on the economy for several years now. The index hit its recession-era monthly low of negative 60 in October 2008, and the highest level it has touched since then was a mere negative 21 (this past January).

These trends are concerning because worries about a poor economy can become self-fulfilling (or at least, self-perpetuating). If people believe the economy will get worse, they’ll hold back on spending and hiring, causing the economy to actually get worse.

A Recession in Our Minds

Are we in a recession in our minds?

Americans certainly seem unhappy about the prospects for the economy. Consumer sentiment remains near its lowest levels since 2009. And those daily indicators of investor confidence — the markets — have painted a very pessimistic picture; the Standard & Poor’s 500-stock index, seen as a broad indicator of the market, is down 8 percent for the year.

But economic data based on what people are actually doing tells a slightly different story. There is no measure by which the economy seems robust, but economic indicators published recently — measuring activity in manufacturing and service, vehicle sales and construction spending — were relatively positive, beating analysts’ expectations. By most measures, the economy is growing, while measures of the national mood are at recession levels.

This disconnect is illustrated starkly in an analysis by Jeffrey Kleintop, chief market strategist for LPL Financial. Mr. Kleintop compared the University of Michigan’s Consumer Sentiment Index, which surveys people about their outlook on the economy, and the Conference Board’s Leading Economic Index, which looks primarily at hard economic indicators like how many hours people are working and what manufacturers are ordering. The gap between these two indexes is at a record high, a mirror image of the late 1990s, when optimism about Silicon Valley inflated the tech bubble.

So why do people feel the economy is doing so much worse than it is? In part, say some economists, it is because of increased cynicism about the ability of the president and Congress to handle the economy. Indeed, the University of Michigan’s consumer confidence index shows a sharp drop this summer during the debt crisis debate. While it has improved slightly since then, it still remains at its lowest levels since early 2009. Economists say that the lack of confidence is also driven by structural changes to the American economy: unemployment has remained high even as the economy has grown slowly, while wages have stagnated for those who are working.

On Friday, the Labor Department will release its monthly report on jobs, which has a particularly visceral impact on ordinary Americans. Last month, the report showed zero job growth nationwide.

“There’s a lot of economic indicators like industrial production, or durable goods orders, that economists put a lot of weight on. Individuals just have no idea what they mean,” Mr. Kleintop said. “When you talk about a change in jobs they get that, they understand what it means. It’s very intuitive. And they take that information and they extrapolate that to everything.”

Another bad report on job growth on Friday will make it hard for consumers and businesses to gain the confidence they need to spend money, analysts say.

There is some evidence that people are capable of saying one thing and doing something else. For instance, even in these times of gloom, sales of many items that could be considered indulgences are rising. On Thursday, Nordstrom and Saks Fifth Avenue said their monthly same-store sales were helped by sales of luxury items. But some experts say they believe that a negative outlook on the economy is ultimately a self-fulfilling prophecy.

“If you talk about recession enough, you can have a recession,” said Andrew Goldberg, a strategist with J.P. Morgan Chase Asset Management.

The stock market can also be pushed downward by a collective lack of confidence, and many analysts describe the market’s behavior in recent weeks as “emotional,” rather than a rational response to the news investors were getting about the economy. The negativity of investors is largely being driven by events in Europe, where policy makers’ lack of decisive action to help Greece confront its debt problems has led to acute fears of a widespread financial crisis.

Attitudes on Wall Street eventually filter back to those on Main Street. According to an analysis by JPMorgan Chase, a 10 percent year-over-year decrease in the S.&P. 500 amounts to a decline of 2.7 percent in the University of Michigan’s consumer sentiment index.

A bad stock market is particularly worrisome because it affects the attitudes of those who have the most money to spend, Mr. Goldberg said. He noted that households whose incomes are in the top 20 percent of the country own about 80 percent of the shares traded on American markets. They also make up about 60 percent of consumer spending, a major driver in the economy. So if this group feels poorer, it has a disproportionate impact, potentially dragging down the population as a whole.

Losing Faith in Government

Washington’s dysfunctional political climate not only makes it harder for Congress to pass sound economic policy. It also means that whatever policies Congress manages to pass may be ineffective anyway, since Americans have lost so much confidence in their government’s ability to help.

CATHERINE RAMPELL

Dollars to doughnuts.

Americans’ confidence in their government is at historic lows, according to Gallup’s annual governance survey.

Dollars to doughnuts.

The poll of 1,017 adults, conducted in early September, found that 81 percent of Americans are dissatisfied with the way the country is being governed, the highest share since the question was first asked in 1972.

Additionally, 69 percent of Americans say they have little or no confidence in the legislative branch of government, also a record high, and nearly three times the share of people who said this in 1972.

Americans estimate that the federal government wastes 51 cents of every dollar it spends, the highest number on record since that question was first asked in 1979. (Because the margin of sampling error was plus or minus four percentage points, however, that is not a statistically significant difference from last year’s poll, when Americans said 50 cents of every dollar the government spent was wasted.)

Almost half of Americans (49 percent) believe the federal government “poses an immediate threat to the rights and freedoms of ordinary citizens.” In 2003, less than a third of Americans said they believed this.

Perhaps most worrisome, Americans’ trust and confidence in the government’s ability to handle policy problems has plummeted.

The light green line above shows that just 43 percent of Americans say they have “a great deal or fair amount” of trust in the federal government to handle domestic problems. That is lower than it was at any time in the past four decades.

If we have another federal government shutdown in the next few days, which is entirely possible, these sentiments will only get worse.

My concern about these survey responses isn’t that they might hurt politician’s feelings. It’s that, in order for government policy to be effective, people must believe it will be effective. This is as true for economic policy as it is for anything else.

In particular, part of the reason that economic stimulus works is that it gives consumers and businesses confidence that the economy will improve. That belief becomes self-fulfilling as they feel more comfortable increasing their purchases and investments.

Likewise, if Americans believe that Congress cannot be counted upon to do anything that will help the economy, nothing that Congress does — no matter how well designed and well executed — will succeed in helping the economy. Perception matters.

Job Insecurity Remains High

For the last couple of years, the problem plaguing the job market was that companies have been in a holding pattern: Companies weren’t laying off workers in high numbers. But if you were already laid off, finding a company willing to expand was impossible.

CATHERINE RAMPELL

Dollars to doughnuts.

Even so, workers still employed remain anxious about their job security, according to new survey data from Gallup.

Dollars to doughnuts.

A USA Today/Gallup Poll conducted in mid-August, based on a survey of 489 adults employed full or part time, found that 30 percent said they were worried about being laid off, similar to the 31 percent who answered this way in August 2009.

The survey also found that workers were concerned that their hours, wages and benefits would be cut back. Benefit cuts were the most common worry, with 44 percent of workers surveyed saying they thought benefits might be on the chopping block.

Lower-income workers were especially likely to be concerned about their job security:

As you can see, workers in households earning less than $50,000 annually were about twice as likely as their counterparts in households making at least $75,000 to be concerned about layoffs, shorter workweeks and off-shoring.

Maybe the anxiety is unfounded, and companies are not planning layoffs at any increased pace. But such worries can become self-fulfilling if workers start cutting back in preparation for potential job losses. If they cut back their spending, companies don’t sell as much and then starting paring down their own staffs.

Washington, Capital of Economic Optimism

CATHERINE RAMPELL

Dollars to doughnuts.

In case you’re wondering why Congress spent so much time twisting itself in knots over the long-term deficit, instead of over the current jobs crisis, this might help explain things: Washington, D.C., is the most economically optimistic area in the nation, according to Gallup.

Dollars to doughnuts.

Every day Gallup polls Americans across the country about whether they think current economic conditions are good (or “excellent,” “only fair” or “poor”), and whether the economy is getting better or worse. For each question, Gallup subtracts the percentage of people answering negatively from the percentage of people answering positively. Then the two results are averaged to come up with a value that Gallup calls the Economic Confidence Index.

If the index value is above zero, that means that people are generally confident about the economy. If the index value is below zero, then people are more pessimistic about the economy.

And guess what? Not only does Washington have the highest index value of any state or district in the country, it’s also the only place where the index value is positive.

Here are the top 10 states in terms of overall economic confidence:

These results are based on telephone interviews with 87,634 employed adults, 18 or older, conducted from January to June 2011 as part of Gallup Daily tracking. For each state, the margin of sampling error ranges from plus or minus 1 percentage point (for large states such as California), to plus or minus 8 percentage points (for the District of Columbia).

The biggest gap between the District of Columbia and the rest of the country is created by the second question used to create the Economic Confidence Index, on whether the economy is getting better or worse.

In every state, a majority of residents think the economy is getting worse. In the nation’s capital, however, a full 60 percent of people think the economy is getting better.

This may be good evidence for those arguing that Washington exists in its own disconnected bubble. At the very least, Gallup’s results show that the District of Columbia thinks very differently about the state of the economy than the rest of the country does.