September 23, 2021

Economix Blog: A Recession in Our Minds

Are we in a recession in our minds?

Americans certainly seem unhappy about the prospects for the economy. Consumer sentiment remains near its lowest levels since 2009. And those daily indicators of investor confidence — the markets — have painted a very pessimistic picture; the Standard Poor’s 500-stock index, seen as a broad indicator of the market, is down 8 percent for the year.

But economic data based on what people are actually doing tells a slightly different story. There is no measure by which the economy seems robust, but economic indicators published recently — measuring activity in manufacturing and service, vehicle sales and construction spending — were relatively positive, beating analysts’ expectations. By most measures, the economy is growing, while measures of the national mood are at recession levels.

Jeffrey Kleintop/LPL FinancialA comparison of the University of Michigan’s Consumer Sentiment Index and the Leading Economic Index shows a wide gap between consumers’ attitudes and economic activity.

This disconnect is illustrated starkly in an analysis by Jeffrey Kleintop, chief market strategist for LPL Financial. Mr. Kleintop compared the University of Michigan’s Consumer Sentiment Index, which surveys people about their outlook on the economy, and the Conference Board’s Leading Economic Index, which looks primarily at hard economic indicators like how many hours people are working and what manufacturers are ordering. The gap between these two indexes is at a record high, a mirror image of the late 1990s, when optimism about Silicon Valley inflated the tech bubble.

So why do people feel the economy is doing so much worse than it is? In part, say some economists, it is because of increased cynicism about the ability of the president and Congress to handle the economy. Indeed, the University of Michigan’s consumer confidence index shows a sharp drop this summer during the debt crisis debate. While it has improved slightly since then, it still remains at its lowest levels since early 2009. Economists say that the lack of confidence is also driven by structural changes to the American economy: unemployment has remained high even as the economy has grown slowly, while wages have stagnated for those who are working.

On Friday, the Labor Department will release its monthly report on jobs, which has a particularly visceral impact on ordinary Americans. Last month, the report showed zero job growth nationwide.

“There’s a lot of economic indicators like industrial production, or durable goods orders, that economists put a lot of weight on. Individuals just have no idea what they mean,” Mr. Kleintop said. “When you talk about a change in jobs they get that, they understand what it means. It’s very intuitive. And they take that information and they extrapolate that to everything.”

Another bad report on job growth on Friday will make it hard for consumers and businesses to gain the confidence they need to spend money, analysts say.

There is some evidence that people are capable of saying one thing and doing something else. For instance, even in these times of gloom, sales of many items that could be considered indulgences are rising. On Thursday, Nordstrom and Saks Fifth Avenue said their monthly same-store sales were helped by sales of luxury items. But some experts say they believe that a negative outlook on the economy is ultimately a self-fulfilling prophecy.

“If you talk about recession enough, you can have a recession,” said Andrew Goldberg, a strategist with J.P. Morgan Chase Asset Management.

The stock market can also be pushed downward by a collective lack of confidence, and many analysts describe the market’s behavior in recent weeks as “emotional,” rather than a rational response to the news investors were getting about the economy. The negativity of investors is largely being driven by events in Europe, where policy makers’ lack of decisive action to help Greece confront its debt problems has led to acute fears of a widespread financial crisis.

Attitudes on Wall Street eventually filter back to those on Main Street. According to an analysis by JPMorgan Chase, a 10 percent year-over-year decrease in the S.P. 500 amounts to a decline of 2.7 percent in the University of Michigan’s consumer sentiment index.

A bad stock market is particularly worrisome because it affects the attitudes of those who have the most money to spend, Mr. Goldberg said. He noted that households whose incomes are in the top 20 percent of the country own about 80 percent of the shares traded on American markets. They also make up about 60 percent of consumer spending, a major driver in the economy. So if this group feels poorer, it has a disproportionate impact, potentially dragging down the population as a whole.

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Consumer Spending Rises, But Inflation Picks Up, too

WASHINGTON (Reuters) — Consumers increased spending for a ninth consecutive month in March as they stretched to cover higher costs for food and gasoline, with inflation posting its biggest year-on-year gain in 10 months.

Despite the rising cost of living, Americans grew a bit more optimistic about the economy this month and even lowered their expectations for inflation over the medium to long term, another report showed Friday.

Consumer spending, which drives 70 percent of the economy, rose 0.6 percent last month after advancing 0.9 percent in February, the Commerce Department said. But prices rose 0.4 percent month on month, leaving spending up just 0.2 percent after adjusting for inflation.

While commodity prices have reduced purchasing power, consumers entered the second quarter with a slightly upbeat outlook.

The Thomson Reuters/University of Michigan’s consumer sentiment index rose to 69.8, from 67.5 in March. The survey’s one-year inflation expectation was unchanged at 4.6 percent, but the five-to-10-year inflation outlook slipped to 2.9 percent, from 3.2 percent in March.

A third report showed factory activity in the Midwest slowed, although it remained at a strong level. The data did little to shake economists’ convictions that growth would pick up in the current quarter.

Economists said tepid demand in the first quarter had left businesses with less of a need to rebuild inventories.

“The need for new orders and production to beef up inventories is greatly reduced and as a consequence, we are seeing the factory sector slow down somewhat,” said Richard DeKaser, an economist at the Parthenon Group.

“Manufacturing is coming off a sprint earlier this year and still moving ahead at a healthy clip.”

The spending report showed consumer prices up 1.8 percent from a year ago — the largest 12-month gain since last May.

An index of core prices, which strips out food and energy costs, rose just 0.1 percent from February, keeping its year-on-year gain at 0.9 percent.

A separate report from the Labor Department showed wages grew at a 0.4 percent rate in the first quarter, and were up only 1.6 percent from a year ago.

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