Economic Sentiment: Driving in a Blizzard

Feb 10, 2011 7:45am

Students of the public mood should keep an eye right now on two factors above all: The pace of job creation – and the price of gasoline. 

Both are critical in terms of economic attitudes, which in turn are an essential element of the public’s broader sentiment on political, policy and social issues alike.
 
Scrutiny’s important because we're at a fraught moment. Since crashing to generation-long lows two years ago, economic attitudes have been inching ahead by a variety of measures, particularly this winter – but exceedingly cautiously. And the run-up in gasoline prices is a major threat to that incipient recovery.
 
The best analogy in understanding recent public experiences of the economy is to think of yourself driving through a howling blizzard. Your hands clench the steering wheel as you peer out the windshield into the whirling snow. You see the outlines of cars spinning off into the ditch. They line the roadside at crazy angles, emergency flashers blinking. Wipers thumping, you drive on…
 
That’s been the long road the past two years. Recently there’s been a little change in the weather – slight, but enough to offer some hope. The snow’s less thick, the wind less powerful, the sky a tad lighter. The road’s still icy. But you’re thinking, with a bit of luck, you just might make it home.
 
Imagine that those cars sliding off the road are friends, relatives and colleagues who've lost their jobs in the great recession, and your hands on the steering wheel represent your own effort to hang on to yours. Voila, we’re back to the economy. Now add in one more factor: You pull into a rest area to gas up – and, like the bad old days of summer '08, it’s 50 bucks to fill the tank.
 
Where these competing pulls take us remains to be seen, but there’s beaucoup room for worry. On jobs, Fed Chairman Ben Bernanke warned just yesterday it'll be several years 'til normalcy returns. Separately, gasoline's at a February high in 21 years of data – and as we reported in our Consumer Comfort Index this week, the last time gas prices soared (from February 2007 to July 2008), economic sentiment plummeted in tandem, the two correlating at a remarkable -.84. If high gas prices today predict sky-high gas prices in the summer, when demand typically rises, we might survive the blizzard just in time to get hit by a tsunami.
 
That said, as noted, other trends are more positive. While still painfully high, unemployment has come off its peak; so has the broader “U-6” measure including discouraged workers and those forced into part-time slots. Moving beyond views of current economic conditions, expectations for the future improved last month, with pessimism dropping to its lowest level in eight years. (Optimism, while hardly robust, is its best since January 2004.) Criticism of President Obama’s economic policies declined last month, and Republicans brightened noticeably after their gains in the 2010 election, itself an economic referendum.
 
The Dow is over 12,000, and it’s one of a variety of measures that correlate significantly with consumer sentiment over the long term; another is GDP, and it turned in a decent Q4 performance. But relatively few folks actively play the market, much less rely on it for ready cash; and fewer still pull out party hats on the basis of GDP. For most of us, other factors hit home harder – jobs, job security, and prices at the pump among them.
 
Which wins matters. In economic terms, consumer sentiment correlates with revolving (e.g., credit-card) debt at .65 on a six-month lag, suggesting that the engine of discretionary consumer spending depends to a significant degree on confidence. And in political terms, our consumer index correlates with re-election rates to the U.S. House at .76. 

Both those make this a particularly important time to keep a very close watch on the road ahead.

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