Confidence Grows, but Remains In Recession Territory

Indicators suggest that many Americans, firms are still not seeing economic improvement.

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Today, two new indicators provide yet more evidence that Americans are feeling better about the economy. Gallup reports that Americans' economic confidence is at a seven-month high. The National Federation of Independent Business reports that small business confidence is also up for the fourth straight month. Likewise, the most recent Reuters/University of Michigan Index of Consumer Sentiment has shown four straight months of improvement. And the Conference Board's Consumer Confidence Index jumped more than 9 points, to 64.5, in December.

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Yet while confidence is definitely trending upward in recent months, levels appear to be mired in recession territory, long after the recession ended.

The U.S. economy as a whole is improving. So why are Americans' perceptions so poor?

A closer look shows that while the future looks brighter for many Americans, the present isn't changing much. Gallup and Reuters/University of Michigan's surveys both showed that improvements in consumers' future expectations are far outpacing what they see to be improvements in current economic conditions.

Small businesses appear to feel the same way; the NFIB's small business survey showed that more firms are seeing downward trends in sales than upward trends. Furthermore, 23 percent of owners in the fourth quarter of 2011 reported that "weak sales" are their biggest problem. Yet most small-business owners still expect that future sales will improve.

Present conditions will have to improve substantially to move confidence—both for consumers and firms—out of the doldrums. The Conference Board's consumer confidence index measures consumer sentiment on a 100-point scale. The current reading of 64.5, says Conference Board economist Ken Goldstein, shows that there is much room for improvement. "We used to think of [a mid-sixties reading] as being associated with the middle of recession. Being more than 2.5 years out from recession, a more typical level of confidence would be up in the 80, 90 range. So we're still on the low side." says Goldstein.

"These are recession-level readings we're getting right now," says Cynthia Magnuson, spokesperson for the NFIB, of that organization's small-business index, which stands at 93.8—slightly better than a year ago, but below levels seen in the early-2000s recession.

Gallup's confidence index is likewise stubbornly low, at -27, on a scale of -100 to +100. That's seven points below where it was one year ago.

Given the low confidence readings, to say that Americans feel "optimistic" in recent months may be too strong a word, says Goldstein. Instead, it may be more accurate to say that Americans are simply "less pessimistic" about the future than they once were.

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And that lack-of-pessimism might be tenuous. While a few encouraging months of jobs reports have contributed to improved sentiments, many economists agree that short-term growth is likely to remain slow, despite recent signs of economic strength. That sluggishness could put a dent in confidence—and thus spending and hiring.

Then again, it can be easy to overestimate consumer sentiment's effect on the economy. New figures from the Federal Reserve this week showed a sharp increase in consumer credit, suggesting that Americans are buying more on their credit cards, as well as taking out auto loans and student loans. As Goldstein notes, those purchases may have been made more out of necessity than on hedonistic spending sprees.

"Since 2008, Mr. and Mrs. Smith or Davis or Williams...have been saying, 'We're going to put up with this old junker or sofa or refrigerator,'" says Goldstein, whereas now, those consumers are saying, "'It's time to replace it' or 'It just simply doesn't work anymore.'"

Fortunately, economic growth hinges on how much, not why Americans spend. So as pent-up demand finally finds an outlet, those purchases could further grease the wheels of the economy, bolstering growth, making current conditions seem brighter, and continuing the cycle of improved confidence and a stronger recovery.