Why Has Consumer Confidence Been So Slow to Recover?

Consumer confidence is one of the most reliable and useful economic indicators. If you had paid attention to it back in 2007 and 2008, you could have safely sold your stocks well before the market plummeted. As reported by Floyd Norris recently in the New York Times, consumer confidence has finally returned to a level above where it was at the start of the recession. However, as we approach five years from the end of the recession, consumer confidence is still well below what is normally thought of as a healthy level and we have reached well past the time to ask why consumer confidence cannot seem to recover.

Floyd Norris notes that respondents' opinions of current business conditions are evenly balanced between good and bad, and that sentiment about the job market is improving. The fact that Congress quickly lost interest in restoring emergency extended unemployment benefits seems to confirm that the job market is getting better. Yet, consumer confidence overall remains rather depressed.

In fact, this is the slowest recovery of consumer confidence in over thirty years. Why is that so?

Employment growth is actually not that much worse than after the previous recession (under President Bush). In March 2006, four years after that recession ended, employment growth peaked at 2.15 percent on a year-over-year basis. In contrast, we are currently seeing annual employment growth at about 1.8 percent, which is only slightly worse.

For further comparison, in the Clinton recovery employment growth peaked at 3.5 percent and averaged about 2.5 percent per year. The last really good jobs recovery was under Reagan when job growth peaked at 5 percent within two years of the end of the recession.

So job growth is slow and that assumedly matters. But it seems unlikely that consumer confidence is being held back by the difference in job growth between 2.1 and 1.8 percent. I suspect that more important reasons are the media's continually negativity and the widespread perception that President Obama and Congress are complete failures.

Media are in business to make money. Even when they fail to do so, they are trying. That means they like stories that attract viewers and readers. Negativity and attacks sell, so the media tends to provide coverage of the minority party criticizing the majority party regardless of who is in power. We spent most of George Bush's presidency hearing how terrible the economy was and we continue to see those stories now under Barack Obama. There are many more stories about the long term unemployed than about the more than 300,000 people hired every month.

It is only natural that if people hear continually about how the economy is in bad shape, how unemployment is very high (which it is), and how businesses are scared to invest in new productive capacity due to high taxes or regulatory uncertainty (also true), people will conclude that conditions are poor and their confidence should not be too high.

Another contributor to low consumer confidence may be President Obama's lack of policy successes. The stimulus is generally seen as a failure that spent lots of money with nothing to show for it. Obamacare's implementation has been botched from its start until today and the administration's constant changing of the rules adds to the perception that the program is not working. Foreign policy has been one disaster after another. Given no successes to point to, it makes sense that people will expect a similar track record of failure on economic policy in the future.

Congress adds to this feeling. With debt ceiling and budget deadlines repeatedly pushing Congress and the federal government to last minute or even past-deadline deals, a rising level of animosity between the Democrats and Republicans in Congress, and no official budget passed since the end of the recession, it is not surprising that Congress has an approval rating near single digits in some polls. President Obama's job performance may be terrible but Congress is seen as even worse by the American public. Why would people think Congress could do anything positive to help the economy?

In fact, given the negative media coverage and the general consensus that our elected leaders are all failing us, perhaps we should be surprised that consumer confidence is as high as it is. Americans are a naturally optimistic people. If the President, Congress, and the government bureaucracy would just stop convincing people they are doing damage to us, consumer confidence and the economy would likely both improve.