When something appears inexplicable, it’s best to start by checking assumptions first. Ylan Mui at the Washington Post should have taken that advice before reporting on a “rift” between the supposedly good economic growth an the American state of mind:
A rift is emerging between Americans’ state of mind and the state of the economy.
The economy is getting stronger, with the nation’s gross domestic product growing at its fastest clip so far this year. The number of new people signing up for unemployment benefits has steadily declined, and consumer spending is rising.
But by almost any measure, Americans remain unhappy. Consumer confidence has plunged to levels last seen during the financial crisis. A recent Nielsen poll found that nine out of 10 Americans believe the country is still in a recession. … This persistent pessimism has perplexed economists.
So what are the assumptions that lead this article? First, Mui implies that the economy is heating up, and that the weekly initial jobless claims rate indicates a significant improvement that consumers should notice. Neither are true.
Let’s start with GDP growth. The third quarter did deliver the best growth number of the year — but that’s a very, very low bar to clear. It hit 2.5%, which beat 1.3% in the 2nd quarter and 0.4% in Q1. But annualized 2.5% GDP growth in a quarter doesn’t indicate a strong economy; at best, it indicates a mediocre economy. It also ignores the economic impact of the Japanese tsunamis and oil-price shocks in the earlier quarters. Look at this graph from the Bureau of Economic Analysis that charts quarterly GDP reports to see how that fits into our economic trajectory:
The Q3 measure puts us in the same post-recovery trajectory that we had before the tsunamis and the oil-price shocks. It’s not significant growth, and there is no reason for consumers to get excited about a preliminary report of 2.5% annualized GDP growth in any quarter.
How about the initial jobless claims? First, the problem for consumers isn’t in the jobless claims themselves, it’s what they represent. We aren’t adding jobs in significant enough numbers to re-employ the millions who lost their jobs. In the post-recovery period, we have added an average of 125,000 net jobs per month — which is only enough to keep up with population growth, not to eat into the swollen ranks of the chronically unemployed. Last month we didn’t even get that much, only adding 80,000 net jobs. However, even looking at the initial jobless claims, we’re only approaching the Q1 range of 380,000 per week, not dropping to the 300K or lower level which historically correlates to robust job creation.
Finally, the entire article misses one key point. Unlike other recessions, this one hit consumer home values hard, which means that their biggest savings asset — their house — has much less equity, or in many cases, none at all. That will force Americans to save more of their income as no one expects home values to escalate like they did in the previous decade ever again. Only those who bought before the bubble and didn’t treat their home equity as ATM machines went relatively unscathed. It’s not difficult to figure out that spending will get suppressed as a result.
When we see significant economic growth, though, consumers will spend again — more rationally this time around, but they will spend again. The so-called “rift” doesn’t exist now, because the economy is not significantly improving. I’d call that rational behavior, a clear connection between behavior and reality.