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Peter Hall

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Breakthrough: U.S. Confidence Finally Returns

Posted: 10/03/2013 5:26 pm

Gloom has been a key feature of the post-crisis world. Confidence reached all-time lows in early 2009 as the reality of a massive correction dawned on the households and businesses of the Western world. Stimulus did little to revive sentiments, especially as the promising initial growth surge faded after six short months. Such persistent pessimism is rare, and it spurred fear among analysts that a permanent psychological reset might dampen spending and investment for the foreseeable future.

Doubtless the media magnified the malaise, but there were indeed big issues to worry about. Faith in financial institutions melted late in 2008. Soaring peak-cycle leverage ratios combined with tumbling mortgage-backed and other assets, pummelled capitalization to the point that massive public bailouts were required to avert a nasty systemic implosion. Failure on such a scale prompted questions about the sustainability of the capitalist system in a high-technology world. Governments, initially the heroes, fell afoul of the public as surging debt levels wreaked havoc with ratings and pushed peripheral countries to the brink. The persistence of these problems has suppressed sentiment for an unusually protracted period. Small wonder many are convinced we'll never see heyday years again.

Although all OECD economies have been affected, Americans have been unusually gloomy. During recessions, American sentiment is typically volatile. Being glass-half-full folks, their normal perception is volatile -- a sort of 'wanna-be-upbeat' schizophrenia. In data-speak, sentiment bounces into and out of the recessionary zone until growth finally takes off, and with it, a renewed surge of optimism. Not this time. Confidence plunged well below recessionary norms, and recovered -- but only within the recessionary band. Although the Index has thrice tried to break free, it remained in the recession-range for over four-and-a-half years.

That length of stay is alarming, to say the least. Pessimism sells, and it spreads quickly. But perhaps its most sinister feature is its tendency to be self-fulfilling -- we can actually talk ourselves in to a new state of low-growth gloom. That was the fear during the Great Depression. Some observed that the economy had had enough time to use up the excesses of the Roaring 20s, but was not getting back to normal activity. At that time, public spending was used as a means of jump-starting the economy, a sort of psychological reset to enable activity to get back to normal.

Our problem today is that we used up our greatest fiscal ammunition just six months after the onset of recession -- long before the excesses of the last, long growth cycle were used up. We probably just hit that point in 2013, but with no room on the fiscal front, and monetary policy red-lining, we arguably don't have sufficient policy levers to pull on. Is there hope for a psychological reset this time around?

One of the most remarkable recent developments in the world economy is the change in US sentiment. After three failed attempts, the Conference Board Index of Consumer Confidence has finally and convincingly popped back into the "normal" zone. And this has occurred in spite of fiscal cliffs, sequestration, debt ceilings, natural disasters, geopolitical crises and financial market volatility. At the same time, European and Japanese indexes are also rising sharply. True, these are still vulnerable to shocks -- like unplanned government shutdowns -- but even so, after all the world economy has been through, it would have to be a pretty big one.

The bottom line? Don't underestimate the recent change in US Consumer sentiment. It has been a long time coming, it happened on its own, and is mirroring like movements elsewhere. If it translates into real spending and investment, it is bound to have a large impact on global economic activity.

 
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