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By Mary Caraccioli
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Posted: 10/30/09 16:03
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RAPAPORT... With a 24/7 news cycle and more outlets for economic news than ever before, it’s hard to avoid the latest bad news. From foreclosures to unemployment, most Americans are aware that even if they are financially secure, their neighbor probably is not. But does all of this bad news, in turn, create more bad news? And, more importantly, does it affect how much Americans consume?
Doom and gloom. That is how Fernando Presser describes economic news coverage. “In newspapers and on TV, it’s all negative.” He says the constant drumming of bad news does have an effect on his psyche. “It is hard to feel good when all the news is bad,” the Philadelphia, Pennsylvania, dentist laments.
This is an important point because the American consumer’s passion for spending, fueled by easy credit and inflated home values, helped to bolster the U.S. and much of the world economy throughout the past decade. As credit tightened and home values plummeted, the “shop ’til you drop” lifestyle came to a screeching halt. In order to have a sustainable economic recovery, most economists believe we need the consumer to feel confident enough to spend. Consumer spending represents a whopping 70 percent of the U.S. economy. Without it, there is no recovery.
“It is the American consumer that drives the world economy,” says Maria Olivero, an assistant professor of economics at Drexel University’s LeBow College of Business. While business leaders point to an increase in consumption in emerging markets like China and Brazil, Olivero says those consumers are not ready to take the spending baton from American shoppers. “Getting consumers to spend in other parts of the world can’t happen if Americans aren’t spending — their economies still depend on the U.S.” she says.
Ben Bernanke, the U.S. Federal Reserve chief agrees, although he’d like to see a change. In late October, he called on Asian governments to increase domestic social programs so their consumers would have the confidence to spend more. Bernanke admitted changing habits would not come fast.
That means the onus for recovery is squarely on the shoulders of the U.S. consumers. If they are still getting inundated with bad news from all corners, will they have the desire to spend? The University of Michigan releases a closely watched survey of consumer sentiment each month. While the index has improved from the nadir set earlier in 2009 (see chart on opposite page), it is still well below the long-term average of around 80. That means the consumer is still not back to anywhere near where he was before the economic crisis.
Cause and Effect
But what is causing the lack of confidence? Is it the news media, or is it the reality of consumers’ situations? There is plenty of theory, but not a lot of evidence, on how consumers’ confidence is impacted by the selection of news source. The theory is that shorter “abstracts” of news stories, the type often available on radio and television — and now the internet — have a more pessimistic effect on consumers than the type of longer articles found in newspapers and magazines.
Olivero has analyzed studies of stock prices and the news to gain insight. She says short-term, knee-jerk reactions to news are often followed by longer-term reactions that are quite different. That may help explain the recent run-up in stock prices after the dramatic sell-off we saw earlier in 2009. But she does not think the surge in stock prices indicates that Americans are ready to spend this holiday season. “It is more an indication that Americans are saving more and some of that savings is going into stocks,” Olivero says.
A new report by the National Retail Federation (NRF) echoes her findings. The 2009 NRF Holiday Consumer Intentions and Actions Survey, conducted by BIGresearch, found that two-thirds of Americans — 65.3 percent — say the economy will affect their holiday plans in 2009, with the majority of these consumers — 84.2 percent — saying they’re adjusting by simply spending less.
BIGresearch says that despite signals that the recession may be over, consumers are still worried. “While the economic climate has shown some improvement from last year’s holiday season, retailers are not out of the woods yet,” says Phil Rist, executive vice president, Strategic Initiatives, BIGresearch. “With a variety of factors still up in the air, including uncertainty over job security, many Americans just aren’t buying into the talk of recovery.”
Until the headlines report job creation over layoffs, it may be tough to convince anyone, other than an economist or stock trader, that we are out of a recession.
Worrisome
Donna Kearney, a mother of two and a medical technician, has weathered the recession with her job intact. She had no trouble qualifying for a recent car loan. But she says the stories she sees on the news about unemployment worry her. She feels her job is still not safe. But is she willing to spend? “We still took our trip to Disney World in August. I thought the park would be empty because of the economy and it was packed.”
Back in Philadelphia, Presser says the news coverage of the economy may be depressing, but it is not affecting his willingness to spend. “I still go out and the restaurants I go to are crowded. It makes me ask: what recession?” Presser says his spending is impacted more by what is happening with his practice and what is happening to his friends and others in his field. “I hear from colleagues that credit is tight, that this isn’t a time to expand the practice. But for personal spending, as long as I am doing well, I feel okay.”
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