Why we're slow to buy
Economists, not traditionally known for their "don't worry, be happy" demeanor, currently seem more optimistic about the US economy's prospects than a lot of consumers.
At the macro level, the economy is seemingly robust. Forecasters expect solid growth this year, with inflation under control and joblessness trending down slightly from the current 5.6 percent level.
"I consider it a fairly booming economy with the exclusion of the labor market. And I suspect that will be solved shortly," says Timothy Rogers, chief economist at Briefing.com, a website for investors. His optimistic view is widely shared among forecasters.
But consumers aren't necessarily buying that line. A variety of surveys show a working public that feels under pressure on issues like wages and job security.
The current slack job market is unusual this far into an economic recovery. Usually, cyclical industries such as manufacturing would be hiring strongly, creating jobs and helping to restore consumer confidence. This time those industries, whether because of competition from China or pressure from investors to boost profits, are finding ways to boost output without hiring many new workers. It's a key factor, but not the only one, behind consumer caution.
"Rising energy prices, a falling stock market, weaker than hoped for labor markets, terrorist threats," all play a role, says Scott Hoyt, director of consumer economics at Economy.Com, a forecasting firm.
The latest snapshot of public attitudes came Tuesday as the Conference Board, a business research group, reported that its consumer confidence index fell very slightly to 88.3 in March from February's reading of 88.5. Some forecasters had expected an even steeper decline.
'While consumers claimed business conditions were more favorable in March than last month, they also claimed jobs were less readily available," Lynn Franco, director of the Conference Board's Consumer Research Center, said in a statement. "The labor market not only continues to dampen consumers' present day spirits, but it is also making them less optimistic about the short term outlook."
How consumers feel about their financial prospects has potentially huge consequences, both economically and politically. Consumer confidence is directly related to the strength of consumer spending, which totals $7.9 trillion and accounts for 70 percent of the nation's economic output. And it forms that backdrop for President Bush and John Kerry, as their presidential campaigns try to shape voters' sense of the economy's health. The issue's centrality helps explain why President Bush spent 3-1/2 hours flying to and from Appleton, Wis., Tuesday morning so he could deliver a pep talk about the economy.
During his 90 minutes on the ground in Wisconsin, the president stressed that the US economy is the fastest growing in the industrialized world. Mr. Bush reiterated that his "pro-growth policies are working" and that he will "not be satisfied until every American looking for work has found a job."
There is widespread agreement that unemployment is key issue dampening consumers' spirits.The 56 economists surveyed from March 19 to 24 by USA Today expect the nation's unemployment rate to fall gradually from 5.6 percent in the first quarter of 2004 to 5.4 percent in the final three months of the year.
An improving jobs picture is crucial to the economy for two reasons, says Joel Naroff of Naroff Economic Advisors, a economic and financial consulting firm. A decline in unemployment will help consumer confidence and thus boost spending. Beyond the emotional boost of a better jobs picture, new jobs are needed to keep the economy moving. "Consumers have been living off of [mortgage] refinancing and tax cuts for 18 months. Those effects will be fading as we move through the year," he says.
"If the economy does not start generating jobs, the economic outlook worsens significantly," adds Hoyt of Economy.Com. "If we do not get an increase in business spending and business hiring, then the recovery will be in significant risk," he says.
A main reason why business hiring is essential is the difference in how consumers have behaved during this recovery. Normally during a recession consumers stop spending. Then, during a recovery "consumers have a large quantity of pent up demand and go on a spending spree," Hoyt says. But in this recession, consumers did not stop spending. There is not much pent-up demand.
Part of the caution evident in the latest consumer surveys is a result of a two-tier phenomenon in the economy, says Raghavan Mayur, president of TechnoMetrica Market Intelligence, the firm that conducts the Monitor's TIPP poll.
Mayur notes that 70 percent of the country "is enjoying the fruits of economic recovery." But 25 to 30 percent of the households are what he terms "job sensitives" - those who have a lost a job in the past 12 months or are afraid of losing one in the next 12. Their concerns were one reason that in the latest TIPP Poll, economic optimism fell 3.6 percent to a reading of 54.5.
The connection with politics is clear. The poll's index of presidential leadership dipped 5 percent in March to 50.9.