Melancholy on Main Street: Confidence Flounders Alongside Economy

Source: http://www.flickr.com/photos/76657755@N04/

Source: http://www.flickr.com/photos/76657755@N04/

Americans were more confident in the United States economy this week than they were last week, according to Gallup’s Economic Confidence Index (ECI). Or, perhaps more accurately, they were less pessimistic. Gallup’s ECI edged up to -15 for the week ended April 6, a 1 point increase from the previous week. This year’s low point was -20, which was recorded in March.

The economic confidence index has averaged a weekly negative score since Gallup began reporting readings in January 2008. 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 -15 recorded for the week ended April 6 represents 40 percent of survey respondents who say the economy is getting better and 55 percent who say it’s getting worse. Moreover, 20 percent of respondents said the economy is “excellent” or “good,” while 34 percent say it is “poor.”

Economic confidence is a widely watched metric because of its implications for consumer spending and business activity. The theory is that increased confidence makes consumers more willing to open their wallets or take on new debt in order to finance spending — the same can be said for businesses. The flip side of this theory is that if confidence remains subdued, so will consumers’ willingness to spend, as will businesses’ willingness to take risks and expand. This latter scenario has pretty much been the way of the world since the financial crisis.

Flat economic confidence in March was mirrored by flat self-reported consumer spending, another economic metric tracked by Gallup. The index compiles Americans’ daily self-reported consumer spending at retail stores, gas stations, restaurants, or online, excluding normal household bills and major purchases such as homes and cars.

Daily spending averaged $87 for the month of March, and as Gallup noted, that average daily spending figure was relatively high. “At $87, Americans’ average daily spending in March looks positive by comparison to spending over the past five years.” Yet, while spending remained relatively high, this month marked the first time since the recession that consumers’ average daily March spending did not increase at least slightly over February spending levels.

The labor market has been casting a long shadow over the economy — and therefore economic confidence — ever since the crisis. Labor market conditions have generally been on the mend, but overall growth has really been anemic. A decline in the headline unemployment rate to 6.7 in recent months has been matched by a decline in the labor force participation rate and modest payroll growth. The March Employment Situation report revealed underwhelming growth, only part of which could be blamed on cold weather.

But severe winters do weigh on business activity, and warmer weather could provide a meaningful boost to economic activity. Manufacturing activity has made a promising turn up, tentatively signaling economic traction heading into the second quarter.

More From Wall St. Cheat Sheet: