Why Consumers Are Upbeat, Despite a Lousy Economy

The economy seems to be getting weaker, yet consumers are feeling better. What gives?

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Here's the latest economic riddle: The economy seems to be getting weaker, yet consumers are feeling better. What gives?

If you look at mainstream data, consumers ought to be feeling worse about the economy, not better. The latest reading on GDP shows that growth is slowing to a crawl. Hiring is on a downtrend, incomes are flat, and it might all get worse if Congress botches the "fiscal cliff" coming at the end of the year.

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Yet consumer confidence surveys make it seem like Americans have moved to another, more utopian place. Confidence surveys administered by the Conference Board and the University of Michigan have both shot upward in recent months. The weekly Bloomberg consumer comfort index has been rising since mid August.

An upbeat consumer mood clearly favors President Barack Obama in this year's presidential election, as we've been documenting in our ongoing Obamanometer series. That reading shows the weak economy to be slightly favoring GOP presidential candidate Mitt Romney at the moment. But improving confidence has been pushing the needle toward Obama, and the economy could flip his way if the stock market picks up a bit, the next jobs report is a little better than expected, or a few other indicators perk up.

So why are consumers feeling more buoyant than they probably should be? Here are four possible reasons:

Layoffs are scarce. Hiring is very weak, which is bad news for anybody looking for a job, but people who have jobs are feeling increasingly secure. Employers have been averaging about 44,000 job cuts per month this year, according to outplacement firm Challenger, Gray & Christmas, which is the lowest level of layoffs in at least a decade. In 2005, by comparison, companies cut an average of 89,000 jobs per month. In 2008, they cut 102,000 jobs per month. One difference is that these days, if you lose your job it's a lot harder to find another one. But the likelihood of losing your job is now much lower.

[OBAMANOMETER: The economy favors Romney]

Gas prices have been falling. Gas prices have an outsized effect on consumer psyches, making people feel terrible when they go up (even though the typical consumer spends less than five percent of his budget on gasoline) and vice versa. Gas prices flirted with the unnerving $4-per-gallon threshold earlier this year, but they're now down to about $3.78 on average, according to AAA. Barring some conflict in the Middle East, gas prices will probably fall further, which is what usually happens in the fall.

Housing seems to have stabilized. The verdict seems to be in on this: Home prices have stopped declining. The true "bottom" in the housing market may even have come late last year or early this year. That doesn't mean the housing market is suddenly going to heat up again. But it's a big relief for millions of homeowners to know their biggest asset has probably stopped falling in value.

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The Federal Reserve is on the case. A lot of smart-alecky inside-the-Beltway types have been bashing the Fed for "debasing the dollar" and raising inflation risk through its "quantitative easing" programs. But many ordinary people see the Fed as the only government agency able to do anything at all to help the economy. Its latest easing program, launched in September, won't create 10 million jobs or pay for the kids' college education. But it seems to have modestly boosted the stock market, which directly helps just about any American with an investment portfolio or a retirement plan. Even if you don't like the policy, you sure don't mind when your holdings swell in value.

Consumer optimism will be seriously tested after the November elections, as Congress tackles momentous tax and spending decisions that will affect most Americans. The mood in Washington will almost certainly be rancorous. The question is whether that will spread throughout the country, or yield to a more cheerful vibe that seems to be settling into many corners of the real America.

Rick Newman is the author of Rebounders: How Winners Pivot From Setback To Success. Follow him on Twitter: @rickjnewman.

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