Economy

Weekly Economic Wrap: Muted Reaction to GM Bankruptcy

by Dennis Jacobe, Chief Economist

Consumers’ mood and job conditions worsen slightly while spending is up slightly

PRINCETON, NJ -- General Motors' government-sponsored bankruptcy and bailout, like that of Chrysler before it, does not seem to have had a significant impact on last week's consumer perceptions. Consumers' mood worsened only slightly, with 47% of Americans rating the economy "poor" -- up slightly from 45% the prior week -- and 58% saying the economy is "getting worse," also up slightly from 56%. Employee-perceived job losses are at 27% while job creation is 22% -- increasing the net new hiring gap to -5 last week from -3 the prior week. Consumer spending is up slightly for the week -- but remains down 48% from a year ago.

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Gallup Consumer Mood Index
(Maximum possible value of 200; minimum possible value of -200)

Gallup's Consumer Mood Index worsened slightly -- eliminating the prior week's slight gain -- and is at -59, or essentially the same as the -58 of the week ending May 24. While the overall consumer mood is down from its most optimistic weekly average of the year (-50), it is much better than it was during the same week a year ago (-104). Given the modest worsening of the consumer mood and the possibility that some of this is the result of rapidly increasing gas prices, it seems as though most consumers may well be shaking off the GM bankruptcy as something of a "non-event" for the U.S. economy overall.

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The Consumer Mood Index is based on Americans' answers to two questions regarding current U.S. economic conditions and the economy's direction. Despite the sharp improvement in consumer optimism over the past few months, perceptions of current economic conditions remain much more negative than positive. Only 10% rate the economy as "excellent" or "good" while 47% rate it as "poor," providing a net current conditions score of -37 that is three points worse than the prior week. Similarly, 58% of consumers perceive that the economy is getting worse, compared to only 36% who think it is getting better, for a net outlook score of -22, four points worse than the previous week.

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Gallup Monitor of Consumer Spending
(Unlimited maximum possible value; minimum possible value of $0)

Americans reported spending an average of $63 per day in stores, restaurants, gas stations, and online last week. This is up slightly from the $57 of the prior week and identical to the average from a month ago. As a result, consumer spending remains down 48% from the same week a year ago, when daily spending averaged $120. (Gallup's spending data are based on Americans' self-reports of the total amount of money they spent the prior day on purchases other than a home, a motor vehicle, or their normal monthly bills.)

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Gallup Net New Hiring Index
(Maximum possible value of 100; minimum possible value of -100)

Gallup's Net New Hiring Index for the first week of June was -5 -- slightly worse than the -3 of the prior two weeks. Job creation fell slightly, as 22% of full- and part-time employees reported their companies were hiring (vs. 23% the previous week). Job losses increased slightly, as 27% reported job reductions in their companies (vs. 26%). This suggests that the deterioration in the job market continues unabated, with jobless claims likely to remain above 600,000 when the Labor Department reports them this Thursday, and with a continuing rise in the unemployment rate.

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Gallup Standard of Living Index
(Maximum possible value of 200; minimum possible value of -200)

The Gallup Standard of Living Index was 59 during the past week -- up from the 56 of the prior week, and unchanged from a month ago. However, it is up substantially from 46 a year ago.

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The Standard of Living Index is based on two questions -- one asking about respondents' satisfaction with their current standard of living and the other about the perceived direction of their standard of living. More consumers continue to say their standard of living is getting better (42%) than say it is getting worse (36%) and more say they are satisfied with their standard of living (76%) than say they are dissatisfied (23%).

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Gallup Consumer Worry Index
(Maximum possible value of 100; minimum possible value of 0)

The Gallup Consumer Worry Index was unchanged at 34 during the first week of June -- the same as the readings of the past several weeks (34) and essentially the same as a month ago (33). The Index was not much different at 37 a year ago.

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Commentary

The muted reaction to the GM bankruptcy is rather amazing from a behavioral economics perspective. The demise of the old GM represents the largest manufacturing bankruptcy in U.S. history. Only one year ago, GM was the largest automaker in the world. And yet, neither Wall Street nor Main Street seemed to react significantly to GM's going bust -- making this major business failure something of an economic non-event.

In part, this may be because of the week's other news coverage. After announcing the GM bankruptcy and bailout, President Obama left for the Middle East. His travels and Thursday morning speech in Egypt led the news coverage, followed by political issues surrounding Supreme Court nominee Sonia Sotomayor and newly proposed healthcare legislation. Friday's smaller-than-expected job losses and higher-than-expected unemployment rate tended to dominate the news at week's end. As a result, many Americans' attention may have been diverted, relegating the bankruptcy to a lower-impact story than it might have been otherwise.

While this focus on other news may be part of the explanation for this "non-event," there are also some other factors to consider. For example, it may be that many consumers paid attention to the news about GM, but it simply didn't have a major bearing on their views of the economy or their own financial situations. It could also be that the number of consumers who perceived the bankruptcy and the government's involvement as good (because it staved off the total shutdown of the auto companies) balanced out the number who perceived it as a negative.

On the other hand, it can also be argued that the federal government prepared Americans for these bankruptcies over the first half of the year and then provided something of a pre-packaged bankruptcy with government financing. As a result of these actions, the impact on the overall economy may have been minimized.

Whatever the reasons, it would have been hard to imagine six months ago, when consumers' mood was nearly twice as negative as it is right now, that either the media or the average American could have largely ignored the collapse of Chrysler -- let alone General Motors. At that time, 60% of Americans rated the economy as poor and 81% said economic conditions were getting worse, and the collapse of two of the nation's Big Three automakers would likely have significantly worsened the negative psychological spiral dominating the U.S. economy.

Once again, it is hard to tell when various policy actions have avoided making the economic downturn even worse -- particularly ones as distasteful to the majority of Americans as those made by the Bush administration and the Obama administration concerning the automaker bankruptcies and bailout. However, at least to this point, this seems to be the case. It remains to be seen whether the same will be able to be said one year or three years from now.

Survey Methods

For Gallup Poll Daily tracking, Gallup interviews approximately 1,000 national adults, aged 18 and older, each day. Gallup's consumer series includes the Gallup Consumer Mood Index (evaluating public perceptions about the U.S. economy), the Gallup Monitor of Consumer Spending (a measure of how much money Americans are spending each day on mainly retail purchases), the Gallup Net New Hiring Index (a measure of employee perceptions of hiring conditions where they work), the Gallup Standard of Living Index (evaluating the public's perceptions about its own standard of living), and the Gallup Consumer Worry Index (a measure of the degree to which Americans are worried about their finances).

The Standard of Living Index is based on questions asked of all respondents; the Gallup Consumer Mood Index, the Gallup Monitor of Consumer Spending, and the Gallup Consumer Worry Index are based on random half-samples of approximately 500 national adults, aged 18 and older, each day. The Gallup Net New Hiring Index is based on a sample of approximately 250 current full- and part-time employees each day.

The sample sizes and associated margins of error for weekly results for the week of June 1-7 are:

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Interviews are conducted with respondents on land-line telephones (for respondents with a land-line telephone) and cellular phones (for respondents who are cell-phone only).

In addition to sampling error, question wording and practical difficulties in conducting surveys can introduce error or bias into the findings of public opinion polls.

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