A rift is emerging between Americans’ state of mind and the state of the economy.
The economy is getting stronger, with the nation’s gross domestic product growing at its fastest clip so far this year. The number of new people signing up for unemployment benefits has steadily declined, and consumer spending is rising.
But by almost any measure, Americans remain unhappy. Consumer confidence has plunged to levels last seen during the financial crisis. A recent Nielsen poll found that nine out of 10 Americans believe the country is still in a recession.
“It’s the hangover from the Great Recession,” said James Russo, vice president of global consumer insights for Nielsen. “People feel the economy not at the macro level but at the micro level.”
This persistent pessimism has perplexed economists. The link between how we feel and what we do is a cornerstone of economic philosophy, what John Maynard Keynes dubbed the “animal spirit” that moves the marketplace. Most of the time, our emotions and our actions move in tandem.
But the gap between the two has widened since the financial crisis. Economists say something will have to give — Americans will perk up or, more worrisome, the recovery will conform to their low expectations.
Lynn Franco, research director at the Conference Board, said consumers have been beaten down too long to be impressed by recent blips of good economic news. The group conducts monthly surveys of consumer confidence that, along with a similar poll performed by the University of Michigan, serve as the official road maps to the consumer psyche. Both indexes plunged to near-historic lows during the third quarter. Though the Michigan survey recovered slightly last month, the Conference Board’s index continued to decline.
“It’s likely we’re going to continue to bounce around these lackluster levels of confidence,” Franco said.
According to conventional theories, depressed consumers spend less money, slowing down economic growth and further eroding confidence in a vicious cycle of decline. That partly explains what plagued President Jimmy Carter in the late 1970s, when Americans were besieged by skyrocketing unemployment and runaway inflation.
This time, consumers have proved willing to pull out their wallets. Consumer spending in the third quarter rose 2.4 percent, the biggest jump this year. After several years of people paying down debt, consumer credit has inched back up to 2009 levels. Meanwhile, the savings rate has dropped to 3.6 percent, the lowest level in four years.
“They’re not happy spenders,” said Chris Christopher Jr., chief economist at the consulting firm IHS Global Insight. “The fear is still there.”
The scales can also quickly tip. Typically, attitudes are merely reflections of major sectors of the economy, such as the job market or stock prices. But during changes in business cycles — from recession to recovery, for example — consumer confidence can provide a crucial nudge, said Mark Zandi, chief economist at Moody’s Analytics.
“One false move, one shock that we’re not anticipating, that will send people into panic mode,” he said.
Some economists cite consumers’ discontent as evidence that the gains of the past quarter are not sustainable. To Ross DeVol, chief research officer at the Milken Institute, the disconnect suggests that another popular scapegoat might be to blame for the nation’s collective malaise: Washington.
DeVol compared the two indexes of consumer confidence with the unemployment rate, the stock market and home prices over three decades. As expected, he found that as jobless numbers fell, confidence rose. As the stock market increased, so did confidence. And when spending declined, confidence dipped as well.
But there were unexplained blips, such as in August when the usual suspects remained stable but confidence nosedived. That was the same month as the acrimonious political debate over the debt ceiling, DeVol noted, when Congress’s approval rating plummeted to a new low of 13 percent. The faith people have in their elected leaders closely correlates to their confidence in the economy, he found.
“It’s not that it’s necessarily a conscious decision in most cases,” DeVol said. “It’s kind of a subjective creep.”
Others caution that reading the consumer mind is an uncertain science. Jason Bram, an economist with the Federal Reserve Bank of New York, analyzed the confidence indexes to see how accurately they could predict consumer spending over four decades. Bram concluded that there is a weak causal relationship between sentiment and action and that even the best intentions could go awry.
“It’s all sort of circular,” Bram said. “It’s hard to disentangle exactly what’s driving what.”