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Economic Pessimism Grips the Public

by Ruy Teixeira

It really is quite extraordinary how pessimistic the public has become about the economy. All this year, the public has been in a sour mood about the economy, as month after month of the economic recovery (now almost four years old) has failed to generate the robust growth people have been looking for. Instead they've been getting stagnant wages, persistent unemployment and high gas prices. And now Katrina, which has put additional burdens on the economy, increased the federal budget deficit and solidified people’s sense that the economic problems just mentioned are unlikely to be solved anytime soon.

Consider the consumer confidence data. In August, the University of Michigan’s Survey of Consumers found that:

Consumer confidence fell sharply....due to the surge in gasoline prices. "Consumers have found it increasingly difficult to cope with the recent surge in gasoline prices as their required budget cutbacks escalated each time they filled their gas tank," according to Richard Curtin, the Director of the University of Michigan’s Surveys of Consumers. The unusually large August decline was widespread among all demographic groups and across all regions of the country. "Consumers anticipated higher inflation, higher interest rates, higher unemployment and a slower pace of economic growth during the year ahead," Curtin said. Although consumers did not anticipate a recession during the year ahead, they were more likely to expect an economic downturn sometime during the next five years.

The Index of Consumer Sentiment was 89.1 in the August 2005 survey, down from 96.5 in July and 95.9 in August of 2004. Only ten monthly surveys since 1978 recorded a larger one-month decline.

That’s bad, but this month it’s likely to get worse. According to a Bloomberg News article previewing this month’s consumer confidence releases:

The University of Michigan's index of consumer sentiment is projected to drop to 78, the lowest since March 2003, from 89.1 in August, a report [on September 30] is projected to show.

Another major consumer confidence index is put out by the Conference Board. They have already released their September data, which show consumer confidence sharply declining from 105.5 in August to 86.6 in September. And the Washington Post/ABC News consumer confidence measure, which is issued weekly, has been declining throughout September.

Other data on the public’s view of the economy underscore the pessimism indicated by the consumer confidence data. The most recent Pew Research Center report observes:

More Americans hold a pessimistic outlook on the nation's economic prospects than at any time during Bush's presidency.

By two-to-one (37%-18%), more believe the economy will be in worse shape a year from now than believe things will improve. In August 2004, just 9% said they expected the economy to worsen over the succeeding 12 months. That number doubled to 18% in January, and has doubled again (to 37%).

In the most recent ARG poll, 60 percent disapprove of Bush’s handling of the economy and 53 percent believe the national economy is getting worse. A mere 11 percent say it is getting better. Looking forward, 53 percent say the economy will be worse in a year, compared to 29 percent who say it will be better. And, for the first time this year, a plurality (45-41) now say the national economy is in a recession.

The poll also finds just 8 percent saying their household financial situation is getting better, compared to 29 percent who say it is getting worse (62 percent say it is staying the same). Similarly, only 15 percent think their household financial situation will be better in a year, while 30 percent think it will be worse.

Finally, Gallup has released a number of recent reports illustrating the depth and extent of current economic pessimism. In Gallup data from late July, 67 percent of the public said it is now harder for them to get ahead financially than it used to be. And in Gallup data from mid-September, 66 percent now say the economy is getting worse, compared to only 25 percent who say it is getting better. In addition, 69 percent describe current economic conditions as being only fair or poor and prospective views on inflation and unemployment are becoming more decidedly more negative:

One of the concerns about the economic impact of Katrina has been inflation. Not only have gas prices spiked, but there has been speculation that the price of many other goods and services may increase as well. Americans seem mindful of this possibility. The new poll finds that 76% believe inflation will go up over the next six months, including 33% who say it will go up a lot. That's the highest expectation of an increase in inflation that Gallup has measured since this tracking trend began in October 2001 (although in May of this year, 74% said inflation would go up).

There has also been an increase in views that unemployment will increase in the next six months, from 44% who said it would go up a little or a lot in August to 52% this month. This change may well be a direct result of Americans' views that the hurricane put people living in the Gulf Coast out of work, at least temporarily.

Gallup also collects data on investors’ attitudes toward the economy. These too are headed south at a rapid clip:

...Investor optimism plunged in September from its already low levels in response to Katrina, according to the UBS/Gallup Index of Investor Optimism. Post-Katrina investor pessimism suggests that holiday sales expectations, although less optimistic than in previous years, may still be too high. Rita probably means there will be additional downward revisions in holiday sales expectations in the not-too-distant future.

Overall investor optimism has decreased significantly in September, going from 61 in August to its current reading of 34. This is its lowest level of the year, and as low as it has been since March 2003.

The Personal Dimension is at 48 -- down from 54 in August and also at its lowest level of 2005. The Economic Dimension is at -14 -- down from 7 in August, suggesting that investors as a whole have gone from neutral to pessimistic about the future direction of the U.S. economy.

This turn toward pessimism has primarily been driven by average investors, who have turned quite sour on the economic situation. Indeed, two-thirds of average investors report that they have cut back spending because of rising gas prices, which are overwhelmingly viewed–both by investors and the general public--as representing a permanent change, rather than a temporary fluctuation.

There is little in these data to suggest that this economic pessimism will lift anytime soon. If it doesn’t, the implications could be profound. As William Scheider pointed out in his most recent column, “Pervasive Economic Pessimism”:

When the economy turns bad, the federal budget deficit becomes an issue. That's exactly what happened in 1992....The risk is that high gasoline prices and low economic confidence will throw the economy into a tailspin. When that happens, people start looking for something to blame. What will they find? The deficit, the war in Iraq, and the Bush administration's ties to the oil industry.

Indeed. We shall see what happens.