Will This Major Drop in Confidence Hurt the Economy?

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Americans’ confidence in the economy plummeted in October. Gallup’s Economic Confidence Index ticked down 16 points, the single largest monthly decline since the daily measurement began in 2008. In the first week of the government shutdown — which began on October 1, the first day of the new fiscal year — economic confidence registered the sharpest weekly decline since Lehman Brothers collapsed in September 2008.

At October’s level of -35, the index fell just below the reading of -32 recorded when Gallup began tracking economic confidence in early 2008, but it was much higher than the all-time low of -60 that came later that year. After one major setback midway through 2011, the index has generally trended upward until hitting an all-time high of -7 in May. Then, it began inching lower.

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It is important to note that confidence improved ever-so-slightly after lawmakers in Washington inked a deal that ended the fiscal standoff, with Americans taking solace in the fact that the United States would not default on its public debt and the federal government would have the funds to begin operating after 16 days of a partial shutdown.

A piece of legislation passed the night of October 16 by both the Senate and the House of Representatives authorized current spending levels through January 15 and extended the debt cushion until February 7. The bill was more like a temporary bandage than an actual solution, and confidence has yet to return to pre-shutdown levels.

The last time the nation’s economic confidence was that low was when a reading of -38 was recorded in December 2011, just after a similar debt crisis was temporarily resolved. In August 2011, following a standoff between congressional Republicans and the White House, President Barack Obama signed the Budget Control Act, which set up automated, across-the-board spending cuts — known as the sequester — in exchange for an increase in the debt ceiling.

Several congressional compromises — including January’s fiscal cliff agreement — pushed back the deadline for sequestration until March 1 of this year. In reality, the sequester was only meant to force lawmakers in Washington to orchestrate a meaningful agreement on how to spend the federal government’s dollars, but Congress and the Obama administration have only continued to kick the can further down the road, manufacturing political crises along the way.

Gallup’s Economic Confidence Index is based on two components: Americans’ assessment of current economic conditions in the United States and their perceptions of whether the economy is improving or becoming worse. In October, both measures grew more negative, but Americans’ outlook for the future declined more than twice as much as their concern for the current economic situation; 68 percent of the respondents to Gallup’s survey said the economy was getting worse, the highest number of such responses in nearly two years.

Comparatively, 28 percent said the situation was improving. These percentages translate to a net economic outlook score of -40, which is 22 points below September’s reading. In addition, 15 percent of respondents said the economy was in excellent or good shape and 44 percent said it was in poor shape, resulting in a net current conditions score of -29, a decrease of 10 points from the prior month.

Screen Shot 2013-11-05 at 8.35.48 AMIt is not one particular group of Americans that is driving the confidence measure lower: All major demographic and socioeconomic groups — from college graduates to young people to high-income earners — posted double-digit drops in confidence, and every group was more negative than positive about the economy overall. Prior to the fiscal stalemate in Washington, confidence among ethnic minorities and Democrats was in positive territory.

“Americans were less positive about the U.S. economy in October than they have been in nearly two years, with their ratings of current economic conditions and the economy’s future course plunging,” wrote Gallup’s Alyssa Brown. “It is clear that partisan gridlock during the fiscal debates negatively affected Americans’ economic views, regardless of their political leaning or socioeconomic status. While it is a positive sign that economic confidence slowly improved in the second half of the month, it has only partially recovered.”

Surprisingly, plummeting economic confidence did not translate into Americans’ self-reported spending for October, suggesting that the drop in confidence was closely tied to evaluations of the political situation rather than the economic situation. This means that the degree to which the economy was affected by October’s manufactured political crisis depends more on whether consumer spending was hurt than the fact that economic confidence took a major hit. According to Gallup, most Americans believe creating jobs is the most important way for the federal government to improve the economy.

In October, excluding household bills and major purchases like a car or home, Americans spent an average of $88 per day, a modest increase from September’s $84 but still below August’s $95. September’s dip was largely due to the looming possibility of a government shutdown.

“To the extent Americans’ decreased spending is tied to concerns about the larger economy, driven to a large degree by the run-up to, and commencement of, a federal government shutdown, it suggests the effects of the government’s budget stalemate go well beyond the temporary halting of non-essential government services,” said Gallup’s September reading of discretionary spending. October’s slight rebound is likely due to the fact that the debt ceiling crisis and budget stalemate were temporarily dealt with partway through the month.

Before the political dysfunction in Washington reached its climax, the economic situation was not exactly rosy — job creation was stumbling and government retail spending figures were weaker than earlier in the year. But the 16-day government shutdown, uncertainty over government spending, and the possibility of a debt default further depressed many economic indicators.

Yet, as long as the labor market improves only modestly and growth in incomes and wages remains relatively stagnant, as it has since the end of the recession in June 2009, many American consumers will continue to be in a difficult position. And if American consumers are in difficult position, so is the economy — consumer spending accounts for approximately 70 percent of gross domestic product, and because government and business spending have remained weak, the economy is depending even more on household spending to fuel growth.

“As job reports continue to fall short of expectations and uncertainty about the debt limit and the federal budget persist, it is possible that consumer spending will decline in the coming months,” Gallup said in October’s discretionary spending report. “Americans’ soured optimism has yet to affect spending, but lag effects are still a concern.”

It is important to remember that the American consumer was already facing difficulties before the political crisis began.“A lot of people are going to say the government shutdown reversed the trend in consumer spending, when in fact when you look back on July, August, September, you already see a slowing or at least a topping out in spending patterns,” ITG Investment Research chief economist Steve Blitz said after last week’s retail data was released from the Department of Commerce. “There’s no question … that the slowdown hurt — the second half of September was a lot slower than first half [but] you will see it in full force when the October numbers come out” on November 20.

Follow Meghan on Twitter @MFoley_WSCS

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