Is the Worst Over?

Some Statistics Show Renewed Confidence, but Economists Urge Caution
Bob Nakosteen

Bob Nakosteen says he and others will know the economy is improving when employment figures start to climb.

This past month, the Consumer Confidence Index reached a new high since the recession began. Some see this as a clear sign that the nation, and perhaps the region, have hit bottom with regard to the economy and that the recovery has begun. Area economists note the positive indicators, but say it may be too early to do any celebrating.

According to reports from the Conference Board, its Consumer Confidence Index shows that in the month of May people were feeling better about the economy, with confidence reaching its highest levels since last September.

In a public statement, Lynn Franco, director of the Conference Board Consumer Research Center, said that “consumers are considerably less pessimistic than they were earlier this year, and expectations are that business conditions, the labor market, and incomes will improve in the coming months.

“While confidence is still weak by historic standards,” she continued, “as far as consumers are concerned, the worst is now behind us.”

But is the worst recession in decades now a subject confined to the past tense? Hardly, say two area economists, who say there is danger in putting too much emphasis on one statistic, especially one like consumer confidence, and predict that there are many difficult days still ahead.

“I am unclear why consumer confidence has had such a large increase,” said Anita Dancs, a professor of Economics at Western New England College. “It doesn’t quite match what is actually going on with the economy.”

Robert Nakosteen, professor of Economics at UMass Amherst, agreed. The Confidence Index numbers need to be taken in context, he told BusinessWest. “That figure was not a new high in any record sense. It’s the highest it’s been in over a year, but it rose to a very historically low level. So consumer confidence is important in that it’s not falling any more, but it’s not what I would call high.”

Six months into the second calendar year of the recession and 100 days into President Obama’s stimulus, there are certainly some positive signs regarding the economy, but these positives must be juxtaposed against doldrums in house prices, the GDP, and other hard numbers. In this issue, BusinessWest takes a mid-year look at the state of affairs with the economy, and what experts project for the months to come.

Jumping the Gun?

Getting a read on what’s happening in the economy these days can feel more like trying to read tea leaves. The same week that the Conference Board published its Consumer Confidence Index, reports on the nation’s GDP showed a 5.7% decline in the first quarter of 2009, hot on the heels of a 6.3% decline at the end of last year. You could say that we are on a statistical seesaw.

“I guess I would caution against getting too optimistic with a statistic like consumer confidence,” said Dancs, “just like I would point to the release recently from the Commerce Department, where the order for durable goods is up; it’s difficult to get overly optimistic, or, for that matter, pessimistic, over one particular piece of data.”

However, one can’t completely disregard the psychology or emotions of the nation at large in such times.

“Obviously, if consumer confidence is up,” she continued, “that’s incredibly important. If people feel good, and they feel that their own economic future looks positive, they’re going to spend more money.”

But is this a situation of the bad just being not as bad?

“What’s happened now is that the rate of descent has diminished to where we may not be descending much more at all, and we’re getting some of these confidence indicators,” said Nakosteen. “The stability that we’re beginning to feel is making people feel more comfortable about the future.

“One of the interesting aspects of the Consumer Confidence Index,” he continued, “is that consumers feel negative about what is happening at the moment, but they feel good about the intermediate-term future. Any turnaround is going to wait, and true stability … well, it’s hard to see where the growth is going to come from.”

So, is it too soon to take the champagne out of the fridge? While increased consumer confidence can translate into increased spending, thereby starting the ripple effect necessary to jump-start other sectors of the economy, is it realistic to think that perception can, in fact, become reality?

“The stock market has rebounded,” said Nakosteen. “Maybe that’s why people are feeling good. But that could be a bear-market rally, and could turn around. There’s nothing really fundamental in the economy that’s going to lead to a quick turnaround.

“The banks are still unhealthy,” he continued, “foreclosures are still increasing, and now they are creeping over to the prime borrowers, not just the subprime borrowers. The only sector of the economy that’s being active is the federal government, with its stimulus package. Even the state and local governments are being very deflationary in their behavior, because they have no money to spend.”

Dancs agreed, and wondered out loud about what rising confidence will translate into with regard to a recovery. “Wages and salaries have been stagnating for a number of years now. And consumer debt has been increasing. People at the beginning of the 21st century felt wealthy because of the housing bubble, but there’s been a trillion dollars of wealth wiped away because of that bubble, and what we’re seeing when looking at housing prices is about $400 billion a month being further wiped out.

“So at the same time that we look at consumer confidence,” she continued, “we say ‘people are feeling good, they’re going to spend money, and that’s going to create a demand for more goods and services, and stimulate the economy.’ But at the same time, people’s income and wealth situations don’t seem to underpin a whole lot of spending.”

History Lesson

Past economic downturns can give one a metric by which to measure current situations. Both economists agreed that there are many systems in place today to avoid any calamities that might have been alluded to by the doomsday soothsayers of the nightly news.

“One of the problems in economics is that true understanding of what is happening right now doesn’t take place until a few months after right now, when we get firm data,” said Nakosteen. “We won’t know when we’ve reached the bottom until we are starting to ascend out of the trough.”

However, he did say that there is a sign that the rate of descent is decelerating, and there are a lot of people who expect employment numbers to start improving. “Not necessarily that jobs will increase, but that layoffs will start to diminish,” he said. “We haven’t seen that yet, but this is what people anticipate.”

Dancs mentioned the role of automatic stabilizers, systems such as unemployment insurance and FDIC security, as stopgap measures to prevent any precipitous skids. “That will always mitigate a recession,” she said.

But this time around, the stakes are a bit different. The forces that sent the nation, and eventually the globe, into such a downward spiral make this a different playing field altogether.

Dancs mentioned the tribulations of the American auto industry having a significant role in this recession. “I think that economists have tied one in 10 jobs in the economy to the auto industry, indirectly and directly,” she said.

“I would say that a lot of what happens to Chrysler and General Motors … well, that’s going to mean a lot more people are going to get laid off,” she explained. “There were no auto layoffs in April, but the overall cumulative effect could have a major impact for the future.”

Nakosteen pointed to the end of the housing bubble. “Consumers aren’t in a position to help bring this economy out of a recession. The recession of the early 1990s was a bit of a delayed reaction to the savings-and-loan debacle. The amount of debt in household balance sheets is so much more than it was 15 years ago, in the late ’80s, early ’90s, when households were saving something in the neighborhood of 10% of their gross incomes. That number over the course of time into the current decade went close to zero and in some cases into negative territory for awhile.

“People aren’t saving anymore,” he continued, “and they are carrying a lot of debt. Credit cards, mortgages that in some cases which exceed the value of their homes … they just aren’t in a position financially or emotionally to bring their wallets out and start spending.”

Ultimately, the early 1990s didn’t see a robust climb out of the recession, said Nakosteen. “That was a pretty anemic turnaround, just like this one is probably going to be. There was a rise in consumer spending that was then maintained throughout the ’90s. We may never really go back to the spending patterns of the ’90s or the first part of this decade. We may be, in a sense, in a long-term lower-consumption society.”

When asked what signs will lead him to feel that the worst is indeed over, Nakosteen pointed to employment numbers. “The economy was going down long before the employment numbers started to deteriorate,” he explained. “The economy is going to start up before the employment rates will be getting better. So when layoffs come to a halt, and maybe we start to see some modest increases in employment, that’s going to be a very good sign.”

Dancs hopes Americans use this time to begin questioning their own consumer confidence, as well as their spending and saving habits.

“One question I have is, how much consumer debt are people willing to continue carrying?” she said. “What happened over the past few decades is that people started to carry a significant amount more debt. Another aspect of today, it will depend on people being willing to continue carrying high levels of consumer debt.

“Consumption makes up 70% of the GDP,” she went on, “so when people feel good, they spend money.”

Shifting focus, she asked, “is our economy moving in such a way that our country will have industries that are competitive in this century? Will we be able to keep up with other countries that are, to some extent, further along to developing the key industries of the century?”

Elaborating, she said, “the recovery of 2001 potentially tells us something about the economy. While the recession ended in November and growth resumed, job losses continued well into the recovery, and it took until February 2005 to reach the employment levels prior to the recession. At the same time, there was little new non-residential investment in equipment and buildings, and consumer debt rose. It is really strange for consumer debt to rise during a recovery. People felt wealthy — in economics, we call this the ‘wealth effect’ — but that wealth was because of inflated housing prices, and has been subsequently erased.”

Riding the Cycle

Nakosteen made an emphatic point that, while he can’t say the worst is over, he does sense that real recovery may soon begin in earnest.

“I should emphasize that this economy is inherently strong,” he said. “There are things that are going to turn the economy around, and the stimulus money is going to really start kicking in next year. Inventories in business have been cut down so low that, even to sustain that low-level business that we have now, they’re going to have to increase purchases. We have an inherently vibrant economy that’s going to eventually dig itself out of this situation.

“There is an emotional business cycle just as clearly as there is an economic one,” he continued. “And it has very tangible effects. Much of the breathtaking and precipitous decline of the end of past year had to do with people’s emotions. Their emotions translated into spending patterns. I get so angry at the nightly news — I mean, I view what is happening out there with my own perspective, and then the nightly news comes on, and they make it seem like the end of the world. It just isn’t.”

Of course, it’s not possible to think a single statistic might be the silver bullet necessary to bolster the economy on its own, but the message is there: people aren’t as afraid anymore. The waters are still uncharted, and anyone’s guess about the economy is just that — a guess.

While the ascent might not be robust, let’s face it — these days, no bad news is good news.

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