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Economic Pessimism Update

by Ruy Teixeira

Last week, I reviewed recent data showing the deep pessimism of the public about the economy. One piece of evidence I touched on was the August report on the University of Michigan’s Survey of Consumers–which was quite negative--and the projected September result for that survey, which was expected to be even worse.
The September report for the Michigan Survey of Consumers is now out and it is indeed worse than the August report. Just how negative it is is well-summarized by the lead from the September report:

Consumer confidence plunged in September to its lowest level in more than a dozen years. “High gas prices had a devastating impact on consumers’ budgets and caused consumers to expect a worsening financial situation during the year ahead,” according to Richard Curtin, the Director of the University of Michigan’s Surveys of Consumers. Over the past fifty years, such steep and widespread declines in confidence have typically triggered recessions. “Among the prior declines that sparked recessions, the most comparable situation was in August of 1990, when consumer confidence fell from the about the same level, by about the same amount, and prompted by the same steep increases in gas prices,” noted Curtin. The key issue is whether the rise in Federal spending due to Katrina and Rita will be sufficient to offset the decline in consumer spending. “While the economy may not be technically falling into recession, the data indicate that consumer spending will weaken in the months ahead,” said Curtin.

The Index of Consumer Sentiment was 76.9 in the September 2005 survey, down from 89.1 in August and 96.5 in July. The one month decline of 12.2 points equaled the largest monthly decline recorded since 1978; the combined August and September decline was the largest two month decline on record, falling a total of 19.6 Index-points. The Index of Consumer Expectations, a closely watched component of the Index of Leading Economic Indicators, fell to 63.3 in September, down from 76.9 in August and 85.5 in July. The one-month decline was the second largest and the two-month decline was the largest in the survey’s history.

Food for thought. We shall see if some of the rather dire possibilities raised by survey director Curtin start manifesting themselves this fall.