Consumers Know More About the Economy Than Economists

Now we know why ordinary folks have been more upbeat that economic news suggested.

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An economic mystery has been solved.

[VIEW: Gallery: Cartoonists Serve Up Economy as a Whale, Airplane, Cliff]

Over the summer, there were two divergent trends in data meant to measure the economy's health. Job numbers released by the Department of Labor showed a worrisome stall in hiring, with just 96,000 jobs created in August and 141,000 created in July. In general, it takes at least 200,000 new jobs per month to keep up with population growth and lower the unemployment rate, so those weak summer numbers signaled a flat-lining economy possibly headed for another recession.

Consumers, however, have been feeling considerably better since mid-July, with surveys administered by the Conference Board, the University of Michigan and Bloomberg all showing sharp improvements in recent weeks. This has happened even though gas prices, which have an outsized effect on consumer psyches, have hovered near the uncomfortably high level of about $3.75 per gallon.

It's hard to imagine that a weakening job market makes consumers feel better, so economists have been wondering what those people who answer confidence surveys have been smoking.

[See Why the Economy Is Turning Obama's Way.]

It now appears, however, that consumers may have a better intuitive sense of what's happening in the economy than the statisticians who gather all the data that economists rely upon.

The latest job numbers show that the earlier stats were too low. The Labor Dept. has now raised its estimate of the number of new jobs by 40,000 for July, and by 46,000 for August. This follows another revision that shows the government understated job gains by an average of about 32,000 per month for 12 months from 2011 to 2012. Put it all together, and economists failed to account for at least 400,000 new jobs over the last 18 months or so. (And that's assuming the latest numbers are more or less correct.)

In a workforce of 140 million, 400,000 jobs might not seem that significant. Yet our whole understanding of the economy and whether it's getting better or worse hinges on relatively small changes that take place from week to week or month to month. That's especially true in terms of this year's presidential campaign, which is a tight race and could fall one way or the other depending on news of slight gains or declines in jobs, gas prices, the stock market or some other indicator.

[See Mitt Romney's Shape-Shifting Tax Plan.]

The ultimate bottom line, in a way, is whether consumers feel better off, not whether the data says they ought to feel better off. Optimism can be self-fulfilling, since it leads to more spending and revives the "animal spirits" among consumers and investors. Ordinarly, people have no way of estimating aggregate changes in the broader economy, but they can tell if economic conditions in their own life are getting better or worse, which can cause confidence to grow, becoming a force that pushes other metrics higher.

One thing that may be happening is that small economic improvements that don't seem like much are boosting consumer attitudes more than they used to. In a way, that makes sense. Five years ago, when the job market still seemed robust, it might have taken a promotion or generous raise to make a typical worker feel optimistic. If you weren't getting ahead as fast as others, you felt like you were falling behind.

These days, basic job security might have the same effect. There are so many people who are unemployed or getting by on insufficient, part-time work that simply holding a full-time job can make you feel like you're getting ahead. In tough times, we define satisfaction down and end up feeling content with less.

Theoretically, this is good news for President Obama, since voters may have lowered their expectations for the kind of prosperity a president ought to be able to deliver. Our "Obamanometer," which measures the extent to which 22 economic indicators are improving or getting worse, shows that recent economic developments have been so weak that they slightly favor Romney. But that may be an older way of measuring change that assumes voters demand better results than they actually do. As long as nothing bad is happening, that may be good enough.

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