(What’s Left of) Our Economy: The Case for Confidence in the Consumer Confidence Surveys May be Weakening

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Barack Obama, confidence, consumers, Democrats, George H.W. Bush, George W. Bush, independents, Republicans, Ronald Reagan, Trump, University of Michigan Surveys of Consumers, {What's Left of) Our Economy

Since psychology and emotions can affect how much individuals and companies spend and invest, and since U.S. economic growth does show signs of slowing from a solid but less-than-torrid pace, surveys purporting to track levels of consumer and business confidence understandably have attracted much more attention than usual.

One big possible problem, though: This era’s white hot political partisanship may be undercutting the usefulness of these soundings. The evidence comes from the widely followed University of Michigan survey of consumer sentiment, and it indicates both that such partisanship has greatly increased and influenced the results since the 1980s administration of President Ronald Reagan, and that most recently, more of this bias has been demonstrated by Democrats than Republicans.

The Michigan findings – which break out results according to whether respondent “usually think” of themselves as Republicans, Democrats, Independents, “or what?” – don’t permit conclusions on longer term trends to be drawn with great confidence. That’s mainly because the university’s Survey Research Center presents only five months worth of results for the Reagan administration, which lasted for eight years, and only twelve months worth for George W. Bush’s similar two-term presidency. Nonetheless, the data for those two periods do contrast significantly with those for the Obama and Trump administrations, which are complete (and bring the story up through this month).

My measure of partisanship compares the degree to which the results for Republican and Democratic identifiers (for the headline Michigan number) diverge from the results for Independent identifiers – which I use as a proxy for non-partisanship, based on the assumption that such Americans don’t permit politics to impact their views on the economy. For example, if during a given month, Independents’ assessment of the economy registers as a 50, Democrats’ as a 20, and Republicans as a 60, the Democrats’ views would be judged to be more partisan. In order to produce figures for each presidency, I calculated the average monthly totals for each of the three political groups for the duration of that President’s administration.

This method shows, not surprisingly, that partisanship has always influenced assessments of confidence. That is, when Democratic Presidents hold office, Democrats’ confidence levels are invariably higher than Republicans’, and vice versa. But during the Reagan years, the average monthly ratings for the economy found by the Michigan researchers were Democrats, 87.66; Independents, 98.14; and Republicans, 108.12.

So the partisan effect clearly was present, but the Democrats’ and Republicans’ perceptions diverged from those of the Independents by about the same degree.

No results are presented for either George H.W. Bush’s nor Bill Clinton’s administrations, but the results for George W. Bush’s presidency were Democrats, 63.48; Independents, 66.04; and Republicans, 78.38. That is, Democrats were only slightly more downbeat. More specifically, their ratings of the economy were 96.12 percent as good as the Independents’, while the Republicans’ was 118.69 percent of the Independents’.

During the Obama years, these results were almost exactly reversed: The average confidence level recorded for Democrats was 84.61; for Independents, 72.67; and for Republicans, 69.63. In this case, the Republican ratings were 95.12 percent as good as the Independents’, while the Democrats’ were 116.43 percent of the Independent’ score. But the partisanship showed by the Democrats under President Obama was still almost exactly as great as that showed by the Republicans when George W. Bush served in the Oval Office.

This pattern has continued through Donald Trump’s presidency so far, but Democratic partisanship looks somewhat stronger compared with the results for the Obama years. During the 32 Trump months, the average Democrat’s rating for the economy has been 76.61, the average Independent’s was 96.37, and the average Republican’s was 120.14. As a result, the Democrats’ judgments on the economy have been only 79.50 percent as positive as the Independents,’ but the Republicans’ has been 124.67 percent the size of the Independent score.

Put differently, during the Obama years, the Republicans’ judgments about the economy nearly matched the Independents’ (being 96.12 percent of the Independents’ average), but during the Trump years, the Democrats’ judgments came to only 79.50 percent of the Independents’ average. Both Democrats and Republicans were much more bullish on the economy under their respective Presidents than were Independents, but the Republicans’ “over-optimism” under Mr. Trump hasn’t been dramatically greater than the Democrats’ “over-optimism” under Mr. Obama.

Another sign of relatively great Democratic partisanship:  According to the Michigan research, Democrats’ optimism about the economy so far this year has weakened much faster than Republicans’.  And Independents’ confidence is actually up slightly so far. 

One cause for optimism about assessing consumer confidence stems from the divergence between the results for the Trump presidency and those for his predecessors recorded by the Michigan researchers. They could suggest that the Trump years are outliers, and that if he’s defeated in 2020, partisanship will remain significant, but will return to normal levels – at least for recent decades. Pessimists, however, can just as reasonably argue that the Trump years might represent a decisive break from the recent past. If the latter group is right, assessing the economy’s prospects by using consumer sentiment surveys – already a challenging task –will become more difficult than ever.

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(What’s Left of) Our Economy: Why Media Recession Cheerleading May Be a Thing

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confidence, Federal Reserve, Mainstream Media, National Federation of Independent Business, NFIB, recession, small business, Trade, trade war, Trump, uncertainty, {What's Left of) Our Economy

Can a national economy be talked into recession? And is this a danger for the American economy today? As known by anyone with even basic knowledge about economics, because psychology (and especially optimism and pessimism) so crucial determines business and consumer decisions, the answer to the first question unmistakably is “Yes,” at least in theory.

There’s a lively debate over whether that’s now a danger – with Donald Trump among others charging that his political and Mainstream Media opponents’ alleged determination to defeat him in the upcoming presidential election has turned them into prophets of doom – but obviously the winner can’t be determined until an actual downturn has begun.

But two notable clusters of evidence have just emerged lending at least some credence to the latter proposition. The first comes from today’s news coverage of a key measure of confidence in the economy – the monthly Optimism Index issued by the National Federation of Independent Business (NFIB), the nation’s leading small business organization.

In quintessential examples of unjustifiably downbeat reporting, the survey’s results were widely portrayed as a sign that the national economic sky is getting close to falling. “U.S. Small-Business Optimism Drops to Lowest in Five Months,” blared a Bloomberg.com headline. “Trump’s trade war is triggering a ‘sharp slowdown’ among American small businesses, warned Business Insider pointedly. “Small Business Optimism Index for August 2019 falls 1.6 points,” specified a brief YahooFinance.com item, which also blamed the Trump trade policies (as did the Bloomberg article).

But if you think about it, two of these headlines themselves strengthen allegations of alarmism. After all, five months isn’t an especially long time period. And 1.6 percentage points isn’t exactly a nosedive.

More important were the points buried in these stories. For example, it wasn’t until the fifth paragraph (of eight) that Bloomberg readers were told that “Even with the decline [from a prior reading of 104.7], the NFIB gauge remains elevated by historical standards, though it’s below the average level since Donald Trump was elected president in 2016.”

And get a load of this statement from the NFIB’s leader, which appeared in a gloomily headlined Dow Jones piece:

“‘In spite of the success we continue to see on Main Street, the manic predictions of recession are having a psychological effect and creating uncertainty for small business owners throughout the country,'” NFIB Chief Executive Juanita Duggan said in prepared remarks. ‘Small business owners continue to invest, grow, and hire at historically high levels, and we see no indication of a coming recession.'”

Further evidence of media fear-mongering – also tightly linked to Mr. Trump’s trade wars – has appeared in a new study from the Federal Reserve. In a September 4 report titled “Does Trade Policy Uncertainty Affect Global Economic Activity?” a team of Fed staff economists seek to document the widespread (and entirely reasonable) belief that “Higher uncertainty could lead firms to delay their investment and reduce their hiring, lower consumer confidence and spending, and ultimately curtail economic activity around the world” – including in the United States.

To make their point, they created and use two measures of uncertainty. The first “is based on searches of newspaper articles that discuss trade policy uncertainty.” The publications comprising this database were “Boston Globe, Chicago Tribune, Guardian, Los Angeles Times, New York Times, Wall Street Journal, and Washington Post.” The second was constructed “in an analogous way from automated text searches of the quarterly earnings call transcripts of U.S.-listed corporations.”

Anyone with even a rudimentary knowledge of trade policy and its recent history might well immediately recognize one serious potential problem with the business-based uncertainty gauge: Public companies have been among the strongest and most influential supporters of pre-Trump trade policies, and have understandably been among the loudest critics – since the President’s pushback threatens established business models that have greatly boosted profits via sales to the high-wage U.S. market from offshored or other factories located in super low-cost countries like China and Mexico, and through the use of subsidized and artificially cheap inputs from numerous mercantile foreign economies.

But much more interesting and revealing: However strongly these companies logically would be expected in their public statements to harp repeatedly on the reality and potential of trade war-related problems (which can be considerably hyped, as I’ve demonstrated), the newspapers in the Fed report’s gauge cited such actual and possible difficulties much more – as the chart below shows. That’s why the solid line in the chart, showing the media’s mentions of uncertainty, has consistently been higher than the businesses’ mentions until very recently. (I know it’s a little hard to eyeball, but make the effort.)

Figure 1: Trade Policy Uncertainty

 

Do these findings mean that the economy has no serious problems, that the odds of a recession in the foreseeable future are negligible, and that Mr. Trump’s trade policy decisions may not exact significant economic costs? Of course not. They don’t even prove the charge that the media is seeking to oust the President by talking the economy down. But do they indicate that a “bad news sells” bias is pervading media coverage of the economy (and the trade war) at an especially crucial stage of the business cycle – and the political cycle? The above evidence makes this allegation look awfully credible.         

(What’s Left of) Our Economy: Have Americans Lost too Much Confidence?

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autarky, China, confidence, decoupling, foreign policy, Gallup, global leadership, national security, public opinion, Trade, {What's Left of) Our Economy

A new Gallup poll on how Americans perceive their country’s position in the world economy can be summed up with the classic “good news/bad news” formula, but encouragingly, the former outweighed the latter. At the same time, for anyone believing that major changes are needed in the nation’s approach to the world, the results are much more mixed.

First, the encouraging data – the latest survey showed the highest share of Americans believing “that it’s important for the United States to be No. 1 in the world economically” since the firm started studying the matter in 1993. This year’s 50 percent level easily beat the low point of 39 percent recorded in 2007 – when the last such poll was taken. Recall that 2007 was a year when major housing market problems had become apparent, but that the last recession officially began only at its very end. In 1993, 46 percent of the public considered global economic leadership important.

At the same time, 49 percent regarded “being No. 1” as “not that important, as long as the U.S. is among the leading economic powers.” The share of respondents offering that answer not surprisingly peaked in 2007 (at 60 percent). In 1993, 53 percent of respondents downplayed the importance of unquestioned number one world economic status.

The Gallup results also reveal a wide recent political gap on this question, with Republicans this year much more likely (64 percent) to emphasize top dog status economically than independents (48 percent) or Democrats (41 percent). Yet the changes over time are at least as interesting. Back in 1993, majorities of none of these groups prized their country being the world’s top economy. Views began diverging notably right around 2000, with the biggest changes being the steady surge starting that year of Republicans valuing America as number one economically. Independents grew less likely to value this status through 2007, but since then, their valuation of global leadership has jumped from 29 percent to 48 percent. Democrats’ views on the issue have changed least, varying between 49 percent viewing such leadership as important in 1993, and 38 percent agreeing with the proposition in 2007. Since 2000, the Democratic numbers have remained virtually unchanged.

Less encouraging – in part because it’s simply not tracking with the facts – is how Americans have viewed their economy’s actual standing in the world. Since 2010, only 17 percent of total Gallup respondents have considered the United States as the world’s leading economy, and since the firm began asking this question, the share believing that the nation held this status has peaked at only 40 percent, around 2000. During the 1990s – or at least starting in 1993 – popular belief in America as the world economic leader grew steadily from the 21 percent level.

In other words, according to Gallup, Americans don’t recognize that, in the last few years, the U.S. economy has outperformed most major competitors by most measures. Indeed, in separate results, China has been credited with world economic leadership. Because there’s no question that China has narrowed the gap with America dramatically since its economic reforms began roughly three decades ago, it seems clear that changes in global rankings – especially related to China – have made powerful impressions on U.S. public opinion. Going forward, I’ll be interested to see whether and how greatly American awareness of China’s mounting list of economic troubles grows – and how it compares with judgments about America’s own fortunes.

Overall, it’s heartening to see Americans increasingly appreciating the importance of world economic leadership – especially given their leaders’ continuing determination to define the nation’s security interests in practically limitless, and indeed utopian, terms. There’s no one-to-one correlation between a country’s economic performance and its foreign policy record. But there’s no doubt that, especially over time, a country losing ground in not only growth but in innovation and productivity will be harder pressed to achieve ambitious security goals, especially in a world of strengthening rivals.

In fact, economic out-performance is especially important for a country with broadly representative government like the United States. In the absence of dire and prolonged national security threats and other emergencies, the public is unlikely to support needed defense budget levels unless domestic spending programs remain generously funded as well. A robustly growing economic pie, in other words, greatly eases the competition between guns and butter.

I’m less happy, however, with Americans’ apparent belief in their country’s current economic weakness, or at least ordinariness. Although the recovery’s future is far from guaranteed, the United States recently has been the best looking house on a block of shabby properties, and in national security terms, relative economic growth and performance is at least as important as absolute growth and performance. And despite new evidence that it will keep military spending levels strong, China’s economic momentum has unmistakably flagged, and it depends heavily on debt for growth. So the Gallup results indicate that Americans are significantly underestimating their country’s power and influence globally, or at least its potential, and overestimating the degree to which its prosperity depends on (or to use the fashionable lingo, is “coupled to”) prosperity abroad.

This seeming misjudgment could be troubling for reasons that, strangely, are diametrically opposed. First, a nation that shortchanges its capacities could falter unnecessarily in the face of security challenges or opportunities. And on the economic front, by wrongly viewing itself in a weak bargaining position, it could settle for needlessly adverse trade deals and other policy outcomes.

Just as important, the Gallup results indicate that Americans don’t even remotely recognize their country’s enormous potential for achieving security and prosperity at much lower levels of risk and vulnerability than those created by regnant strategies of deep global engagement in both spheres. Nor, as a result, do they understand the possibilities of economic and foreign policy approaches that simply seek to reduce risks and vulnerabilities, as opposed to the radical step of seeking substantial autarky.

Gallup speculates that until the financial crisis struck, “Having been the world’s largest economy since the 1870s, Americans — at least in recent decades — may have taken their country’s leading economic stature for granted.” Gallup adds that, as other powers have risen, notably in the developing world, “Americans have begun to value being the world’s dominant economic power more highly.”

That sounds positive, because although Gallup provides no insights as to why economic preeminence is prized, its numbers suggest that the public is focused on its tangible benefits, not intangibles like bragging rights. At the same time, the poll also indicates that, since the admittedly subpar American recovery began, the public’s views of their country’s strengths and its policy implications have swung too far toward the opposite extreme.

(What’s Left of) Our Economy: Gallup Shows Americans’ Views are (All of the Above)

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college costs, confidence, debt, Gallup, healthcare, household finances, inflation, Jobs, living costs, polls, retirement, savings, wages, {What's Left of) Our Economy

Although I post a lot on public opinion polls, that doesn’t mean I take them as gospel, even when they don’t deal with trade policy (where, as I’ve shown, they tend to be incompetently constructed). These new sets of survey results from Gallup – a pioneer in the business – show us why.

Gallup consistently has been reporting that Americans’ views of the nation’s economy and of their own economic circumstances have improved significantly in recent months. Notably, since these questions started being asked in 2008, record high shares of Americans now consider themselves to be “thriving” and record low shares believe that they’re “struggling.” Not surprisingly, as a result, the greatest percentage of respondents since the recession began told Gallup that their own financial situations have strengthened in the last year, and the share stating that they’re worse off financially over the last 12 months is approaching pre-recession lows.

The public is more optimistic about the future, too – at least according to Gallup. After languishing in negative territory throughout the recession (often deeply so), the company’s economic confidence reading has turned slightly positive over the last month, and has stayed above zero (neutral) since. Pretty encouraging, right?

But then how can we explain Gallup’s new results on how Americans perceive their greatest financial problems?

Actually, the first problem with this poll is that it’s not clear whether respondents are being asked about their own family’s biggest financial problems or the nation’s as a whole. Even so, however, the answers are still pretty weird given those results above.

In particular, every single one of the top ten problems listed makes clear that Americans don’t have the money they need. They are (in descending order): health-care costs, inadequate wages and “money”, too much debt, college expenses, retirement costs, housing costs, overall living costs, job loss, taxes, and inadequate savings. In fact, if you add up all the percentages of respondents identifying these problems – which all look pretty serious to me – as their biggest, you get 75 percent. That strikes me as an awfully high level of financial distress.

Over the last year, the results in four of the ten possibilities worsened, they remained the same in one (retirement savings), and improved significantly only on the inflation, jobs, and college costs fronts. At the same time, the share of respondents who specified no top financial problems (the answer possibilities were open-ended) rose from 12 to 17 percent, and made up the largest single answer.

If you can make head or tail of this crazy quilt of responses, let me know. Till then, I’ll be taking the expression “United States of Confusion” a lot more seriously.