With less than six weeks to the election, President Obama is benefiting from a curious paradox. Although the economy remains weak by most indicators, consumer optimism has registered a distinct, though modest, gain. The stock market is up, as are the three main confidence surveys — from Gallup, the University of Michigan and the Conference Board. The contrast suggests some possible explanations: (a) the economic indicators are backward-looking and the economy is stronger than the numbers suggest; or (b) something else — the political conventions, gasoline prices, the Federal Reserve’s latest credit easing — has made people slightly more optimistic.
Either way, it’s good news for the president. The rise in consumer optimism has coincided with gains in his approval rating and a widening of his lead over Mitt Romney in most opinion polls. Of course, there’s no assurance that either will last. If September’s unemployment figures, scheduled for release Oct. 5, are poor, economic sentiment — and the president’s prospects — could reverse.
But for now, a better mood is clearly helping Obama. In September, the Conference Board’s confidence survey rose to 70.3 from 61.3 (on an index of optimism with the year 1985 equaling 100). Though the index is still historically low, it has regained levels of earlier in the year. Consumers are “considerably more optimistic about the short-term outlook for business conditions, employment and their financial situation,” according to the Conference Board’s Lynn Franco. Similarly, the Gallup and University of Michigan indexes rose sharply in September and are now close to yearly highs.
Economist Gail Fosler, a consultant who once headed the Conference Board, attributes the improvement to “the combination of [a higher] stock market and rising housing prices. People are beginning to see houses move in their neighborhood.” The job market could also be stronger than a string of weak monthly employment reports indicates. The Labor Department reported that last week’s new claims for unemployment insurance dropped 26,000 to 359,000 — a level often associated with falling overall unemployment, because job gains significantly outnumber job losses.
Still, downbeat economic indicators abound. On Thursday, the Commerce Department lowered its estimate of economic growth for the March-June quarter from an already-weak 1.7 percent to an anemic 1.3 percent. (The figures are annualized growth rates for the quarter.) About 0.2 percentage points of the reduction reflected the effects of the Midwest drought; the heat has cut grain harvests. But there were also downward revisions of consumer spending and exports.
As troubling, the government reported on Thursday a steep 13.2 percent drop in orders for durable goods — machinery, vehicles, computers, telecommunications equipment — in August. Two-thirds of the decline stemmed from lower orders for commercial aircraft, which are typically volatile month to month. But even excluding transportation — which also covers cars and trucks — new orders fell 1.6 percent. And overall shipments to customers fell 3 percent, the largest decline since January 2009 at the depth of the Great Recession.
What partially explains the slump is the reluctance of businesses to commit themselves to major new investment projects, says Nigel Gault, chief U.S. economist for IHS Global Insight, a consulting firm. “There’s a lot to worry about — the fiscal cliff, Europe, how much China is slowing.” For the July-September quarter, IHS forecasts a meager growth rate of 1.5 percent. U.S. manufacturers are suffering from weakness in both exports and business investment, he says.
What’s more, adds Gault, businesses’ restraint in undertaking new investments suggests skepticism about a spurt of job creation. “If businesses are so cautious about investment spending, it’s hard to see why they’d be optimistic about hiring,” he says.
So there’s a puzzle: Stronger consumer optimism is at odds with weaker business behavior. The election’s outcome could hang on how that puzzle resolves itself between now and November.