Low Economic Confidence Is Not Just a Hangover

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At some point, someone is going to have to come up with a term to describe the sort of systematic melancholy that persists for years after a serious economic shock. Five years after the financial crisis, there’s still a lot of financial hardship, pervasive unemployment, and no clear or competent leadership from the nation’s policymakers. Even though there is merit to the idea that a recovery is flowering in the United States, the mood is grim and confidence is low.

There are 3.6 million long-term unemployed in the labor force and undoubtedly many more no longer in the labor force — participation has fallen more than 3 percentage points since the crisis. At 35.4 weeks, the average duration of unemployment is still near record highs, and the long-term unemployed account for more than 35 percent of total unemployed persons in the country.

The mood is gloomy, and Gallup’s U.S. Economic Confidence Index reflects this. For the week ended February 23, Gallup’s ECI edged up to -15, reflecting the fact that Americans harbor more pessimism than optimism about the state of the economy. Gallup’s headline Economic Confidence Index is a composite of Americans’ assessment of current conditions and future expectations; it has a theoretical minimum score of -100 and a theoretical maximum of +100.

At negative levels, the index suggests that more Americans are pessimistic about present and future economic conditions than are optimistic. The economic confidence index has averaged a weekly negative score since Gallup began reporting readings in January 2008. For the week ended February 23, 42 percent of respondents for the ECI survey said the U.S. economy is getting better and 53 percent said it is getting worse.

But Gallup’s ECI, though informative, doesn’t necessarily capture the entire picture. In January, the Conference Board’s Consumer Confidence Index actually climbed to its highest level since August. The index 3.2 percentage points to 80.7, above economist expectations for a more mild increase to around 78. The lowest point for the index last year was 58 in January, while the highest point was reached in June at 82.1. During the Great Recession, the index averaged a dismal 54.

The signals are mixed, but the economic reality facing Americans is equally mixed and weighted to the downside. U.S. economic output is about 10 percent below potential as calculated in 2007 before the crisis. Some economists — notably, former Treasury Secretary Lawrence Summers — believe that this under performance is more than just a hangover that the nation will eventually and naturally heal from. Speaking at the International Monetary Fund’s Economic Forum in November (video below), and later expounding his point to the media, Summers has suggested that the U.S. could be experiencing secular stagnation.

“Secular stagnation refers to the idea that the normal, self-restorative properties of the economy might not be sufficient to allow sustained full employment along with financial stability without extraordinary expansionary policies,” Summers told the Washington Post in an interview in January. Low consumer and economic confidence measurements support the idea that people believe there is little or no latent economic energy tucked away in the corners of the U.S. economy.

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