Why Gloomy Consumers May Spend Anyway

Disgust with Washington doesn't translate into depressed spending.

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Americans are in a foul mood.

Recent confidence readings show that consumers are as gloomy as they were at the worst moments of the recession, in late 2008 and early 2009. Those were apocalyptic times. Companies were axing jobs by the thousands. Stocks were in a nosedive. The government was launching rescue measures most people had never heard of before.

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What's puzzling now is that the economy, while hardly booming, is in much better shape than it was during the depths of the recession. It's growing instead of shrinking. Layoffs have tapered off. The economy has added about 1.3 million jobs over the last year. Yet consumers seem to be losing heart. One component of the Reuters/University of Michigan survey shows that expectations for future economic conditions are at the lowest level since 1980. That was a time when inflation was about 12 percent and a sharp recession was just beginning.

So the dichotomy between consumer confidence and actual economic conditions seems perplexing—until you factor in the role played by politicians in Washington. Confidence was actually at much healthier levels until the summer, when it plunged by about 25 percent. What might have triggered that? The reckless performance by members of Congress who waited until the last second to extend Washington's borrowing limit, threatened a default on America's debt, and for all the huffing and puffing produced a weak deal that will reduce the national debt by far less than most experts think is necessary. Congress. Killed. Confidence.

It's obviously dismaying that a body whose job is to look out for American interests is harming them instead. In polls by Gallup, more than 80 percent of people disapprove of the job Congress is doing, among the worst readings ever. But disgust with politicians may not mean that consumers are shutting their wallets. New Research by economist Ross DeVol of the nonprofit Milken Institute in Los Angeles finds that falling stock prices and a weak economy have been minor factors pushing confidence down, but that "most of the drop in consumer confidence was attributable to the job approval rating of Congress."

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That might merely confirm what already seems obvious, but it has important implications for economic growth. Consumer-confidence levels usually help predict spending, since confidence typically reflects whether incomes are going up or down and people feel like they've got cash in their pockets. Since consumer spending still accounts for 70 percent of the U.S. economy, confidence levels have fairly direct implications for growth. Lately, with confidence plunging, many economists have been cutting their growth outlook. Forecasting firm IHS Global Insight, for instance, has reduced its estimate for GDP growth this year to just 1.5 percent, and to just 1.8 percent for 2012. That would be an extremely weak performance, barely keeping the economy out of recession.

But DeVol argues that confidence may now be a weaker indicator of future spending than it used to be. The huge drop in confidence over the summer, he points out, has not been followed by a proportionate plunge in spending. Retail sales in August—in the immediate aftermath of the debt-ceiling fiasco—were basically unchanged from the month before, and up about 7 percent from the same time a year earlier. Retailers had been hoping for a bigger back-to-school boost, but at least they didn't endure the kind of wipeout that would have happened if consumers were really as dour as they were at the depths of the recession.

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If the trend continues, it means that consumers might be depressed, but their spending isn't. DeVol predicts that consumer spending for the third quarter will rise by between 2.5 and 3 percent, which isn't a runaway pace but isn't recessionary, either. While there's plenty that could go wrong, DeVol also sees some positive signs, such as record-low interest rates and a falling debt burden on the typical household. "There is room for cautious optimism," he writes.

Since Americans now expect so little from their government, there's also an outside chance that an "upside surprise" from Washington could lift spirits and in turn boost the economy. The congressional "supercommittee" assigned to come up with further debt-reduction measures by late November might actually do it, without another political meltdown. Mere competence in that process would be an unexpected breakthrough. Congress could even end up passing a jobs plan that jump-starts the recovery for good. Unless Congress dramatically exceeds expectations, however, skepticism looks to be a new national pastime.

Twitter: @rickjnewman

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