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Consumer Perceptions Become Economic Reality

Consumer Perceptions Become Economic Reality

by Dennis Jacobe

As we enter the second half of 2002, the basic economic data reflect a situation not much different from what many prognosticators anticipated. Economic growth was much stronger than expected in the first quarter, but it slowed in the second quarter. Corporate profits and capital spending have not increased as hoped, but the consumer has continued spending. Overall, the hard economic data suggest that the economy can return to a comparatively normal 3% to 4% growth rate during the second half of 2002 -- not the booming recovery some had hoped for, but also not the double-dip recession some had feared.

In sharp contrast, the financial markets tell a much different story. There is a crisis of confidence on Wall Street. The Gallup/UBS Index of Investor Optimism* shows overall investor optimism at 72 in June -- its second-lowest point in history after September 2001. Investor losses during the first half are in the trillions. And major U.S. companies continue to virtually implode on a weekly basis. As a result, the attitudinal economic data suggest that the economy will experience a double-dip later this year.

These sharply different outlooks have many economic observers talking about a significant divergence between the so-called "real" economy and "perceived" economy as reflected by the psychology on Wall Street. They argue that the underlying real economy is doing fine, recovering at a moderate pace as might be expected following a mild recession. Investors, consumers, employees and the public at large should simply calm down and look to the real economy. According to this divergence theory, the second-half recovery will continue, and all the current aberrations impacting investors will work themselves out in the marketplace.

Perceptions Are Reality

Those of us who place a significant weight on public opinion and the prevailing attitudes of investors, consumers and employees, however, don't buy the divergence theory. In economics, like politics, perceptions are often reality. If the public loses confidence in corporate America, all kinds of economic negatives arise.

  • U.S. investors lose money as the markets decline. They tend to take money out of the equity markets and place it in cash equivalents or the new favorite, real estate.
  • Foreign investors lose money. They also tend to take their money out of the market. The dollar declines. This helps U.S. exports, but not money costs or prices.
  • As consumer confidence declines, so does consumer spending. Of course, consumers continue to be the key force keeping the economy going at this point.
  • As employee confidence declines, the fear of unemployment increases. Employee spending declines, creating a major downward pressure on total consumer spending.

Lagged Effect

I do not see how the current crisis of confidence can be separated from the overall U.S. economic outlook. In my view, negative economic perceptions are highly contagious and are already in the process of spreading.

  • Business executives are doing everything possible to strengthen their balance sheets and their cash positions. This does not bode well for capital spending, inventory building or employment growth in the near term.
  • Concerned about public confidence, accountants will be very conservative. They will recommend conservative asset valuations and a conservative approach to profits.
  • Market losses and a lack of investor confidence will have a negative impact on consumer spending.
  • If the crisis of confidence continues for many months, employees will become increasingly concerned about the companies where they work, and therefore decrease their spending.

What many observers are missing is the lagged effect in public perceptions. It takes time for the concerns on Wall Street to spread throughout the economy. In 2002, this may take even longer than during past economic downturns, because it has been so long since we've had a significant recession in the United States. Many of today's business leaders, consumers, employees and investors have not experienced the difficulties of such a recession. I think the reason consumers have continued spending while the economy has slowed is because they see the slowdown as only a temporary inconvenience. From this perspective, the current economic data -- like consumer confidence -- is simply lagging behind the new reality of public perceptions.

Need to Act

Public policy-makers often act after an economic downturn has already run its course. It takes time for the new economic reality of a recession to be widely understood, then for those in the nation's capital to react. In this instance, I hope the decision-makers who live in the world of perceptions recognize the critical and immediate need to restore the public's confidence in American business and Wall Street. In my view, the current crisis of confidence is just as big a threat to the future of the U.S. economy as the threat of terrorism.

*Results are based on telephone interviews with 1,000 investors, aged 18 and older, conducted June 1-14, 2002. For results based on the total sample of investors, one can say with 95% confidence that the margin of sampling error is ± 3%.


Gallup https://news.gallup.com/poll/6355/Consumer-Perceptions-Become-Economic-Reality.aspx
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