Economy Is Improving, Yet Most Americans Are Pessimistic by Gary D. Halbert
FORECASTS & TRENDS E-LETTER
by Gary D. Halbert
November 17, 2015
IN THIS ISSUE:
- Economy is Improving But Most Americans Are Pessimistic
- How Can This Be When Consumer Confidence is Way Up?
- Conclusions: Most Americans Fear We’re Headed For Trouble
- A Fed Rate Hike in December? – Here We Go Again & Again
Here’s what Charlie Munger had to say at the Daily Journal meeting
Charlie Munger spoke at the Daily Journal Corporation's Annual Meeting of Shareholders today. Although Warren Buffett is the more well-known Berkshire Hathaway chief, Munger has been at his side through much of his investing career. Q4 2020 hedge fund letters, conferences and more Charlie Munger's speech at the Daily Journal meeting was live-streamed on Yahoo Read More
Today we tackle several issues. We start with the fact that several new surveys show that most Americans remain pessimistic about the economy and the direction the country is headed. This is despite the fact that the economy has been growing for the last five years, the unemployment rate is the lowest in seven years and the stock market has more than tripled since 2009.
Yet despite these latest reports showing that most Americans are pessimistic about the future, the widely-followed Consumer Confidence Index has risen sharply in the last few years. Most analysts have no answer for this discrepancy. I have some specific thoughts on this contradiction, and I’ll do my best to explain it today.
The much stronger than expected unemployment report on November 6 has sent the stock markets sharply lower in recent days, based on fears that the Fed will hike interest rates at its next policy meeting on December 15-16. I’ll offer my thoughts on what will determine the Fed’s decision next month. I wouldn’t bet money on a rate hike just yet.
Economy is Improving But Most Americans Are Pessimistic
The unemployment rate has declined for seven years; the economy has been in expansion for more than six years; and the stock market has more than tripled since 2009. Things are definitely better, right? Yet you wouldn’t know that based on the results of several recent polls.
You also wouldn’t know that from the politicians running for president who regularly trash the economic recovery in nearly apocalyptic terms. Presidential candidates from the two parties scarcely differ on whether Americans are “being crushed” – it’s more a question of whether runaway income inequality or runaway government is to blame.
When Americans were recently asked by GALLUP if they’re satisfied with the direction of the country, only 25% said they are; 75% said they are not. That’s better than it was in the depths of the recession in 2008, but there’s been no consistent improvement over the past five years.
Gallup’s Economic Confidence Index even shows economic confidence deteriorating over the past year, a period in which gas prices have dropped to around $2.00 to $2.50 a gallon and the unemployment rate has continued to decline.
Similarly, the latest RealClearPolitics poll on the direction the country is headed found that only about 28% believe the country is headed in the ‘right direction’ while almost 64% believe that the country is headed down the ‘wrong track.’
Rasmussen has a poll similar to the RealClearPolitics poll shown above. It asks basically the same question as to whether respondents believe the country is heading in the right direction or on the wrong track. The latest numbers from Rasmussen show only 27% answered ‘right direction’ while 66% answered ‘wrong track.’
So, we have three different polls from three different respected polling groups which all show the same thing – that around two-thirds of Americans believe the country/economy are headed in the wrong direction – presumably with a fear that things are going to get even worse before too long.
Small business owners are similarly concerned. As the presidential debate season intensifies, small business owners are pessimistic about the business climate and feel America is on the wrong track, according to a recent survey.
The wide-ranging survey, “Opinions of Small Employers,” from the conservative-leaning National Federation of Independent Business (NFIB) found that nearly 70% of small business owners believe the overall US business climate is only fair or poor.
What’s more, six years out from the Great Recession, 63% of those polled said the country is on the ‘wrong track.’ The NFIB surveyed 500 business owners with up to 250 employees. Their top concerns were out-of-control federal spending, rising healthcare costs and the need for tax reform.
How Can This Be When Consumer Confidence is Way Up?
While the various polls and numbers shown above suggest that the mood among most Americans is negative, the Conference Board, which measures consumer confidence, finds a much different outcome. The Consumer Confidence Index has risen significantly since 2009.
While the Index dropped sharply in October, it has risen significantly since the low in late 2012. So the obvious question is, why the disparity between the Conference Board and the other pollsters noted earlier?
The Conference Board shows consumer confidence at roughly the same level as in the mid-1980s, whereas Gallup shows confidence in the country’s direction as about half what it was in the mid-1980s. Gallup’s economic confidence index declined in the past year while the Conference Board’s confidence index rose.
Both the Conference Board and Gallup are independent polling organizations with long and respected track records. One reason for the differing reports is the fact that the Conference Board and Gallup ask different questions and in different ways.
Gallup just asks directly if people are satisfied or dissatisfied with the direction of the country, and whether economic conditions are getting better or worse. But the Conference Board asks a series of questions: if business conditions are good or bad; if jobs are plentiful or not; if people expect their income to increase or decrease; and if people think there will be more jobs a year from now.
Specifically, Gallup asks directly about mood, whereas the Conference Board asks questions more focused on how people are doing in the economy.
In some ways it’s a paradox: Most Americans who want jobs have them; most work for firms that are doing OK; and more than twice as many expect their incomes to rise than to decrease over the next year.
But ask them how the country/economy is doing, and they say badly.
The Wall Street Journal asked the 63 economists it regularly surveys to explain the large difference between the Conference Board results and the Gallup results. For the most part, the economists were divided between two wonky yet interesting explanations.
On the one hand, 40% of economists said they believe the contrast is mostly a cyclical phenomenon – the economy always has its ups and downs and people are slow to pick up on it. But they’ll come around eventually.
For now, this explanation goes, people still remain deeply unsettled or scarred by the Great Recession, but their pessimism will fade with time as cyclical improvement becomes clearer. Many people just don’t feel good, even if their own finances are doing better.
But the slightly more popular explanation, favored by 42% of economists, is that the lack of confidence is a structural phenomenon (ie – permanent). Yes, unemployment is down and GDP has been growing, but these factors bounce around a long trend line, and that trend line skews toward the negative.
Finally, the abject failure in Washington to govern also saps confidence among most Americans. Combine that with the anemic growth in the economy for the past several years, and people will say that the country is still moving in the wrong direction and the economy remains weak.
All of this has produced an undercurrent of anxiety among Americans and explains why about two-thirds of Americans are pessimistic, as the Gallup polls show. On the other hand, many Americans’ personal situations have improved the last few years, as the Consumer Confidence Index shows.
Conclusions: Most Americans Fear We’re Headed For Trouble
Here’s the bottom line for me. Most Americans are working hard, despite the sluggish economy, and jobs are getting easier to find. Yet most working Americans know that our out-of-control debt of $18+ trillion is a ticking time-bomb that will blow up at some point.
They also know that half of our population is dependent on government subsidies to varying degrees and many do not work. Working-class Americans know in their hearts that this growing entitlement society is a recipe for disaster. No wonder they are pessimistic!
Virtually all of the polls show overwhelmingly that American voters have lost faith in government. According to the latest RealClearPolitics average of over a dozen different polls, only 12.7% of voters believe that Congress is doing a good job, whereas a whopping 78.0% disapprove.
It is my opinion that more and more Americans have lost faith in President Obama as well. I have long argued in these pages that this president is a liberal ideologue who does not have the country’s best interest at heart. Recent examples include the Iran nuclear deal and the Keystone XL pipeline.
You may also remember that I warned about this back in 2012 before Mr. Obama was re-elected. Specifically, I recommended that my clients and readers see the documentary movie 2016: Obama’s America to understand where Obama wanted to take the country. [Note: the documentary movie is available on Amazon Video, Google Play, Hulu, etc.]
Now, with the benefit of hindsight, more and more Americans want Mr. Obama to finish his term and go away, and I couldn’t agree more. We want a president who believes in the greatness of our country, and one who is not willing to diminish that greatness.
I believe this helps to explain why numerous polls show that two-thirds of Americans believe the country is headed in the wrong direction, even if they may be enjoying success personally.
A Fed Rate Hike in December? – Here We Go Again & Again
This issue of the Fed’s first rate hike in more than eight years is getting mind-numbing! Ever since Fed Chairman Ben Bernanke first warned of a rate increase in 2012, the stock and bond markets have been on a roller-coaster – down when a rate hike seemed likely, and up when “lift-off” seemed off the table.
So when each and every major economic report comes out, we get wild swings in the markets. A stronger than expected economic report sends the markets sharply lower based on fears that the Fed will hike rates at its next policy meeting. Likewise, with every weaker than expected economic report, the markets rally on the assumption that a rate hike is unlikely just ahead.
Frankly, I’m tired of writing about this, but since this decision is having so much effect on the financial markets, I feel I have to keep you abreast of the latest thinking. The big question now is whether the Fed will feel compelled to hike the Fed Funds rate at its last 2015 policy meeting on December 15-16.
Various Fed spokespersons have said repeatedly over the last year that the central bank believes the economy is strong enough to make the first rate hike. This is especially true in light of the latest unemployment report for October which showed the unemployment rate went down to 5.0% and a whopping 271,000 new jobs were created last month, far above expectations.
While the economy continues on an upward, albeit slow, trajectory, the Fed has also made it clear that the inflation rate is still below its target rate of 2%, as measured by the Personal Consumption Expenditures Index (PCE), minus food and energy.
As you can see in the chart above, the PCE is still well below 2% and is trending lower. Now the PCE doesn’t have to be at 2% for the Fed to initiate lift-off, but the Fed has to feel confident it will rise to that level fairly soon before it is comfortable making the first rate hike. There is no evidence of that happening anytime soon.
What is clear now, and has been for some time, is that the Fed wants to raise rates sooner rather than later so it has room to lower rates again whenever the next recession arrives.
Many Fed-watchers concluded that the much stronger than expected October jobs report would give the Fed the all-clear to initiate lift-off at its December 15-16 policy meeting. As a result, stocks went into virtual free-fall again in the last week or so.
The stock markets had managed a strong comeback following the August meltdown, and many analysts had turned bullish once again. But the much stronger than expected October jobs report sent the markets into yet another tailspin. It remains to be seen what will happen just ahead, given the growing assumption that the Fed will initiate lift-off on December 16.
My position remains the same. The much stronger than expected October jobs report on November 6 will not be enough, by itself, to prompt a rate hike on December 16, especially with PCE inflation well below the Fed’s 2% target.
In my opinion, only if we see even more positive economic reports between now and December 15-16 will the Fed seriously consider lift-off at that meeting, especially since the PCE number is not expected to change much between now and then.
Finally, I assume (and hope) that none of my clients or readers are making any investment decisions based on the expectation that the Fed will, or will not, raise rates at the next policy meeting in December. No one can predict what the Fed will do.
Our hearts and prayers go out to the families of all the victims and those injured in last week’s vicious terrorist attacks in Paris. According to Rasmussen, American voters are less confident of their safety here at home than ever before – and that survey was completed before the latest horrific attacks in Paris.
Very best regards,
Gary D. Halbert