Less Is More, If “More” Government Is What Consumers & Business Owners Fear

Recent polls indicate that far more consumers are concerned about the level of our debt and deficits than they are about unemployment (perhaps because 9 of 10 people who want a job have one, but all 10 are concerned about the now-clearer implications of excessive spending and debt accumulation). So, it would seem to follow that if consumers are most afraid of debt expansion, then more large government programs to “stimulate” the economy might heighten their fears and produce even more contractionary behavior (more saving, postponed buying) which could offset, even overwhelm, any expansionary power the new program might contain. Measures of consumer and business confidence in August strongly suggest that confidence in the future of the economy deteriorated in the past month.

Small business owners were clearly not convinced by the debt ceiling agreement, as sentiment, after eroding by small amounts for 5 months, took a plunge in the August survey; a vote of “no confidence” on policy. Only 7 percent thought business conditions would be better in 6 months while 41 percent expected them to be worse, 23 points worse than July. Twenty-one percent expected real sales volumes to rise over the next 3 months, but 34 percent expected declines, a net deterioration of 12 points from July. The prospect of no real progress on the spending/deficit path clearly discouraged business owners.

The August University of Michigan/Reuters poll of U.S. households provides more support for this proposition. Three-fourths expect “bad times” for the economy in the coming months, just below the survey record of 82 percent reached in 1980. Asked for examples of recent news that explained their pessimistic view of the economy, 25 percent provided spontaneous negative responses about government, a record in the 50-year history of the survey (the last record occurred in 2010 when the health care act was passed). When asked to rate the Administration’s economic policies, 57 percent gave a negative rating, a record high, exceeding the worst ratings given to any past President. Only 5 percent had a positive view of Administration policies. Survey director Dr. Richard Curtin put it well: “Consumers have shifted from being optimistic about the potential impact of monetary and fiscal policies to a sense of despair and pessimism about the role of the government.”

If more debt and government spending have become the major concerns of a majority of consumers, then the more the government tries to do with big spending and borrowing programs (“we’ll tell you how we’ll pay for it later”), the more fearful of the future many consumers and business owners will become, inducing them to spend even less and save more. This does not promote the recovery we need in the consumer sector to re-start hiring and small business investment.

If this is the case, it might be more stimulative to announce a bold plan of retrenchment in government spending, identifying very specific spending cuts (particularly in special interest spending which is not broadly popular) that would occur immediately to clearly and convincingly reduced the deficit and later even reduce the level of debt. With confidence in the future restored, consumers and business owners may well be much more willing to bet their earnings on the future by hiring and spending. This is the kind of broad-based “stimulus” that is needed, growth in the private sector (with the employed spending more money), not in government’s share of GDP. Absent confidence, tax cuts will be saved, not spent, and current consumption might be reduced as well. It’s a “confidence game” worth thinking about.

Some Good News from Consumers

On January 29 the University of Michigan reported that its Index of Consumer Sentiment was 74.4 in January (March 1965=100). That was the highest since January 2008, the first full month of the recession.

Survey director Dr. Richard Curtin said, “Consumers are overwhelmingly convinced that the worst is over but nonetheless expect stagnating income and job prospects rather than solid growth during the year ahead.” Consumers’ attitudes and spending should rise during the course of 2010 as economic growth continues.

Consumers: Can Bad News Be a Harbinger of Great News?

On October 27 the Conference Board told us that their measure of consumer confidence fell from 53.4 (1985=100) in September to 47.7 in October. Even worse, the part of the index that measures what consumers think about current conditions fell to 20.7 from 23.0 in September, the lowest since the 17.5 of February 1983.

Both these results are undoubtedly due to the high rate of unemployment. That was 9.8 percent in October compared to 10.4 percent in February 1983. Click here to read the full post and comment (Insights subscribers) »

Shoppers Are Happier and Have More Money to Spend

On June 26 the BEA released their “Personal Income and Outlay Report: May 2009” and it had lots of good news. Total personal income leapt by 1.4 percent or $167.1 billion in May from April to a record SAAR of $12.3 trillion.

Disposable personal income shot up by 1.6 percent in May from April or $178.1 billion to a new record of $11.1 trillion. Personal savings shot up to 6.9 percent of disposable personal income, the highest ever recorded in the fifty-year history of the data series. Click here to read the full post and comment (Insights subscribers) »

More Good News from Consumers

On April 17 the Reuters/University of Michigan preliminary April index was reported at 61.9 (March 1966=100), up from 57.3 in March.  This was the highest since 70.3 last September.

This is one of many indicators suggesting that the US economy has stopped the “free fall” that began after the collapse of Lehman Brothers on September 15.  This would be great news if it holds.

Also, we got an upbeat report on unemployment claims on April 16.  Click here to read the full post and comment (Insights subscribers) »