Whose happiness drives the economy?
A strange inversion has happened in the past few months: Consumers have gone from being deeply pessimistic about the future to slightly optimistic at the same time that companies have moved from being slightly positive to increasingly negative. That discrepancy is intriguing, and raises the question: Which view will determine the course of the near future? Will the buoyed spirits of people carry the day, or will corporate glumness pull us down?
The evidence that consumers are perking up comes from the multiple consumer sentiment surveys done each month, especially those conducted by the University of Michigan and the Conference Board. The most recent Conference Board survey released earlier this week showed consumer confidence at its highest level since February 2008, while the University of Michigan index of consumer sentiment had surged nearly 30 percent from a year earlier as of late November. The Michigan survey revealed more optimism about the employment situation than at any point since 1984.
Some of the improvement in sentiment indicated by these surveys is clearly tied to a better housing market, with prices increasing across the country. Some of it can probably be explained by just how pessimistic people have been over the past few years. These reports cannot compare how people felt in 1984 with how they feel now. The scores are based on purely subjective questions about how people feel (“Do you think that a year from now you will be better off financially, worse off, or just about the same?”). The change in scores is reflected month by month, but the surveys say nothing about the quality of those feelings over time.
So while the surveys show the most positive results in years, it’s possible that they are only positive relative to how negative people were in 2009, 2010 and 2011, and that compared to the 1980s and 1990s, people aren’t actually feeling so confident. The same goes for income: More people than at any point since early 2008 say their finances are improving; that raises the index. But given that most incomes have been stagnant for the past decade or more, improvement does not necessarily translate into objectively good.
Still, the shift is noticeable, and even more so when juxtaposed with what business leaders say and the steps they are taking. Executives seem fixated on the logjam in Washington and the uncertainty surrounding the “fiscal cliff” and tax rates next year. A Wall Street Journal study of 40 major companies found that more than half planned drastic cuts to their investment and spending through the end of this year and into next year in response to the potential for higher tax rates. Business leaders have been aggressively lobbying in Washington these past weeks to make clear to the White House and Congress that if there is no resolution of the “fiscal cliff” the consequences for business will be dire. That is leavened somewhat by other reports, such as yesterday’s durable goods orders, that indicate more modest contraction. Still, the prevailing sentiment is, as Dupont’s chief executive officer, Ellen Kullman, said, “We’re pulling back … and taking a wait-and-see attitude.” Others have been stark. Said Brian Moynihan of Bank of America: “Uncertainty continues to hold back the recovery. Simply put, our clients tell us they will not be aggressive in times of uncertainty.”
The current business pessimism and consumer optimism is in sharp contrast to the consumer pessimism and business optimism of the past few years. As the overall U.S. economy has struggled and the situation in Europe has been perilous, businesses – especially larger global corporations – have been doing just fine. From 2009 to 2012, the companies of the Standard & Poor’s 500-stock index generated double-digit profits and even healthier revenue gains based on booming business in China, Brazil and other emerging economies.
Now, however, corporate profits are slowing, revenue growth is more of a struggle and the haze of Washington isn’t helping. Having been sanguine about their prospects as the U.S. economy swooned, companies are glum even as economic activity perks up.
Which of these forces will be determinant? First off, consumer sentiment is a notoriously fuzzy gauge of future activity. How people feel in the present rarely correlates precisely with what they spend in the future; the exception has been when consumers stated intentions to buy big-ticket items such as cars. (Possibly, this is because people tend to save in advance. When they say they plan to but a car in the next six months, they have already set their plans in motion,) Still, income levels tend to be a better predictor of what people will spend, along with the value of their homes and the ease of obtaining credit. Given that incomes are stable and slightly growing, homes values are on the rise and credit is easing, it’s a good bet that people will spend a bit more and the overall economic picture will brighten.
As for corporations, CEOs are not particularly good at forecasting. Collectively, they are at best on the cutting edge of conventional wisdom, so when there is anxiety about things like the fiscal cliff, they exude anxiety. And while spending by companies is a key component of economic vitality, spending plans are much more elastic than they were decades ago and can be adjusted more rapidly. That may not be true for building a manufacturing plant, but it is certainly true for hiring and marketing and inventory. So present concerns and stated intentions to cut back could change quickly to exuberance and plans to spend more freely.
It is often said – because it is correct ‑ that you shouldn’t bet against the American consumer. Americans have shown a remarkable and consistent predilection to spend over the years, with only a few notable pullbacks such as during the worst periods of the past few years, when savings increased dramatically and credit-card usage declined. Millions of Americans are unemployed and underemployed, but tens of millions more are employed, gainfully and adequately if not passionately and enthusiastically. Excepting Europe, the global outlook is about as stable as it has been, ever.
While sentiment is just one gauge and its predictive power is unclear, it does underscore a real shift of late in how people view their present and future. Yes, people despair about Washington politics, but that is an old discontent fueled by the issues du jour. And yes, expectations have undoubtedly come down in recent years, as people reconcile themselves to more modest changes and more realistic horizons. But that is a good thing. Shooting for the stars never hurts, but expecting at all times to reach them does none of us any good. Businesses sentiment matters, but it is the consumer – which at the end of the day is we, all of us, you and me – who will power this lumbering collective forward. And for now, that is precisely what they are doing.
PHOTO: Students stand in formation on a field as they form a smiley face in an attempt to break a world record in celebration of the 110th anniversary of their university in Nanjing, Jiangsu province April 27, 2012. REUTERS/Sean Yong