Why We're Gloomier Than The Economy

By Neil Irwin
Washington Post Staff Writer
Wednesday, June 18, 2008

Ask Americans how the economy is doing, and their answer is stark: It is not just bad, it is run-for-the-hills terrible. Consumer confidence is at its lowest level in almost 30 years. Only 12 percent of Americans think the economy is in good shape. On the Internet, comparisons to the Great Depression are widespread.

But the reality is different. According to most broad measures of how the economy is doing, it's not all that grim.

Soft? You betcha. In recession? Quite possibly. And a crisis in the financial markets has rattled nerves for months now. But so far, the economy is holding up better than it did during the last two recessions in 1990 and 2001. Employers haven't shed as many jobs, the unemployment rate is still relatively low, and gross domestic product has kept rising. Things are nowhere near as bad as they were in the Great Depression, or even during the severe recession of 1982-83. The last time consumers were this miserable, in May 1980, the jobless rate was 7.5 percent and inflation was 14.4 percent. Now those numbers are 5.5 percent and 4.2 percent respectively.

This paradox has created a unique challenge for those guiding the economy, who worry that Americans' pessimistic views will become a self-fulfilling prophecy. Two-thirds of the economy is consumer spending. So if people's negative outlook leads them to cut their spending, a steeper downturn could happen.

This has left economists trying to figure out why Americans' perceptions are so much more negative than the data analysts use to measure how things are going.

"We're saying that we feel a lot worse than we did at the depths of the last recession, when we had had 2 or 3 million job losses, that we feel worse than we did after

9/11," said William Cheney, chief economist of John Hancock Financial Services. "At some level, that just doesn't make a whole lot of sense."

But through the prism of daily experience, it may.

The run-up in gasoline and food prices, for example, appears to affect people's perception of how they're doing more than a similar price rise in other goods.

Eric J. Johnson, who studies behavioral economics at Columbia Business School, offers this example: Someone who has to pay an extra $25 to fill up his car is reminded of that cost once a week -- or more often if you count the times he is driving down the road and sees the $4 per gallon price in giant numbers on a sign. Technically, he is no worse off than if his rent had increased by $100 a month. But it feels a lot worse.

"Things that you buy more frequently and that have large percentage increases will weigh more in people's perception of inflation," Johnson said.

Not only that, but increases in the price of gasoline and food affect almost everyone.

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