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.”