America's most widespread psychological malady today may be an acute case of economic funk. By most measures, Americans are as depressed about the economy as they've been in recent memory. The Conference Board's monthly index of consumer confidence--which measures how buyers feel about the economy and its prospects--recently dipped to 46.3, its lowest level since December, 1974 (chart). In the past five months, consumer confidence has plunged by fully one-third.
Consumer blues could be terrible news for a U.S. economy struggling to pull out of recession. The danger? Consumer spending makes up two-thirds of the nation's gross domestic product, and a depressed consumer is less likely to pull out his wallet. "It's hard to imagine how the economy could recover with consumers remaining this depressed," says Edward Yardeni, chief economist at brokerage house C. J. Lawrence Inc.
Just why are Americans so blue, even as solid signs of economic recovery appear? New-home sales have risen, factories are cranking up, and lower interest rates are easing debt service for millions. But until the average Joe sees sustained evidence of these gains, he'll measure his mood by different yardsticks: a cousin's recent layoff, measly 4% rates on bank certificates, the neighbors' house that's listed for 20% less than it sold for three years ago, President Bush's floundering reelection campaign, and Japanese sniping at American work habits.
BIG CHILL. Even if the economy turns up by spring, that may not be enough to restore the high levels of confidence that most folks held before the recession. Indeed, the deep-seated pessimism may not completely lift until the country sets about making fundamental changes. "It's one thing if you believe growth will resume and your children will be better off than you are," says Henry J. Aaron, an economist at the Brookings Institution. "No one feels that way anymore."
In part, the problem is simply that the recession is wearing on longer than most anyone expected. To many Americans, the downturn's big chilling effect has been to put their jobs in jeopardy--either in reality or in some fearful imagining. Joblessness keeps rising, most recently to 7.1% in January. More telling to job hunters is the dearth of employment ads: The Conference Board's Help-Wanted Advertising Index, which tracks newspapers across the nation, fell in January to its lowest point since 1983.
And if workers don't come home from the office worried about their jobs, they get a reminder many evenings on the tube: In recent weeks, for instance, the TV news, newspapers, and magazines have all seemed filled with reports of contractions and layoffs at such once-invincible companies as IBM and General Motors Corp. The headlines and hype often ignored the fact that the two companies were simply providing further details of more general announcements issued late last year. Little wonder, then, that Leo J. Shapiro & Associates, a Chicago researcher, found nearly half of all Americans expect that they or someone in their household will be laid off or face a cut in work hours next year.
Even some who aren't in danger of getting a pink slip feel a lot poorer. Fully 62% of consumers say their after-tax income is down from six months ago, according to recent surveys by market researcher Sindlinger & Co. Once again, they're probably right: Per capita income, adjusted for inflation, has stagnated since 1986, and real hourly compensation in manufacturing actually fell in every year but one.
Compounding the worries about jobs and wages is the real estate slump. Beneath the cocktail-party chatter about who got a great deal on a six-bedroom Victorian fixer-upper, Americans seem to have been stunned into a persistent dismay about the collapse in housing prices. Nationwide, the average sale price of a new home, adjusted for inflation, has fallen by nearly 8% since the end of 1987. In the hardest-hit areas, including California and New England, the slide in values was much steeper.
Far harder to track, but as important to the consumer psyche, is America's view of itself. And these days, consumers are suffering from a massive inferiority complex. Thanks to critical comments about U.S. workers by Japanese politicians, the chronically eroding market share of Detroit carmakers, the sale of U.S. assets to foreigners, and the prospect of a tougher rival in a united Europe, Americans are discouraged about the country's competitive standing vs. the rest of the world. Indeed, despite the burst of "Buy American" spirit that followed the President's ill-fated January trip to Japan, Honda Motor Co. and Toyota Motor Corp. both expanded their share of the U.S. auto market that month. The irony of it? Overseas, American goods are doing just fine, thank you. The U.S. trade deficit, at $74 billion, last year closed to its narrowest gap in eight years.
Plainly aggravating consumers' crisis of confidence is a sinking feeling that U.S. leaders aren't up to the task of rectifying what's wrong. As Congress in recent weeks debated how to jump-start the economy with this tax cut or that, it became plain that there were few even on Capitol Hill who believed the measures were designed to do much more than embarrass leaders of the rival party. By the time the House bill reached the floor, it won passage by a bare handful of votes. No wonder the insurgent Presidential campaigns of Republican Patrick J. Buchanan and Democrat Paul E. Tsongas have, against all odds, caught fire.
An annual poll by Louis Harris & Associates shows that Americans hold a stunningly low level of confidence in their institutions--a trend that began way back with the Vietnam War. But in the roaring 1980s, it hardly mattered, as consumer confidence soared: In 1989, the Conference Board's index stood at 116.8, its highest level since 1969.
`PRETTY UPSET.' Today's outlook is clouded by the crushed expectations of middle-aged Americans. The baby-boom generation in particular is suffering from a big drop in confidence, reports Plog Research Inc. of California. "A lot of baby boomers are pretty upset about how things worked out for them," says Yardeni. This broad swath of consumers grew up in a world where economic insecurity was Mom and Dad's hangup, buying a house was a prudent investment, and a white-collar job was a ticket to prosperity. Funny thing about expectations: Like rules, so often they seem made to be dashed.
What's going to turn things around? Fewer layoffs, more hiring, higher real incomes would all do a lot to push consumers out of their blue funk. Signs of an economic recovery are sprouting (page 31 13 ). But it's unlikely that consumers will adopt anew their swagger of the 1980s. That would require a commodity that's even scarcer than confidence right now: hopefulness.