With unemployment soaring to 8.1 percent in today’s Labor Department report, it's fair to wonder when consumer confidence finally will lead the economy to recovery.
The answer: Maybe never.
Not that the economy won't recover; just that confidence may well not lead it. That was the experience in the last deep recession in 1990-1991: Confidence in current economic conditions, as measured in the ongoing ABC News Consumer Comfort Index, didn’t regain its pre-recession level until late 1994, more than three and a half years after that recession technically ended.
There’s good reason, much of it detailed in our poll last week on the contours and causes of economic anxiety. It demonstrates that economic confidence isn’t merely an attitude, but rather a reflection of reality – specifically the reality of job losses, pay cuts and the loss of investment savings. People who have experienced these (or who've had friends or family members get the chop) are far more likely to lack confidence.
A regression analysis supports that conclusion. Being hurt financially in this recession, suffering a job loss or pay cut in the household, or, if not, having a family member or friend sustain a job loss or pay cut, all are significant, independent predictors of economic anxiety, measured both by financial insecurity and by cutting back on personal spending. Further, in a paper I co-authored back in 2003, we found that unemployment is one of the single biggest correlates of consumer confidence.
That is logical – if you’ve gotten hammered, you’ve pulled in your horns. But the fact that today’s lack of confidence is rooted in actual experience makes it danged hard to talk it away. A guy with appendicitis doesn’t need a shrink; he needs a surgeon.
President Obama's been trying a little of both. On one hand he talked up stocks earlier this week, saying their valuations are starting to look good – the jawboning approach. On the other, he said he expects confidence to recover only slowly, as his stimulus package produces job growth.
Slowly could turn out to be a bit of an understatement, given the experience of 1990-91. ABC's consumer index, figured on a scale of +100 to -100, was -14 in June 1990, just before the recession began. It dived to -31 by March 1991, when the recession technically ended. But it kept worsening, bottoming out at -50 in February 1992. Its recovery was so slow that it regained and held its pre-recession level only in December 1994, four and a half years after the recession began, and three and three-quarter years after it officially ended.
That was too late for George H.W. Bush. In 1992 he declared the recession over, and in a narrow sense (rising GDP, and whatever else the Business Cycle Dating Committee uses in its alchemy) he was right. (Back story here.) But it was not over in a way that was apparent to ordinary Americans, in terms of job security, advancement opportunities, rising incomes, secure savings and the like – a reality that cost Bush re-election. Consumer confidence recovered not when the president said it should, but only when Americans felt economic improvement in their daily lives.
Today our consumer index is -49, well within sight of the record low in 23 years of weekly polls it hit Jan. 25. As covered in our latest CCI report, 95 percent of Americans say the economy’s in bad shape (it’s been more than 90 percent for a record 17 weeks), 76 percent call it a bad time to buy things (it’s been more than two-thirds for 68 weeks, second only to a stretch from 1990-93), and 52 percent say their personal finances are hurting (half or more for 32 weeks, surpassed only by a 40-week run in 1992-93).
There has been some look-ahead improvement – the number who say the economy’s “getting worse” has moderated to 58 percent, after spiking to 82 percent in October. Still that’s a lot of pessimism, and a mere 8 percent say the economy is getting any better.
Expectations are the consumer metric to watch most closely; they tend to anticipate the end of recessions better than ratings of current economic conditions. But whatever the measurement you use, with current views as grim as they are, informed by data such as today’s jobs report, a recovery in confidence will take more than talk. It’ll take progress, and from all appearances, that’ll take time.