How a Nation Got Snookered by a Phony NarrativeCaroline Baum
Feb. 7 (Bloomberg) -- Back in the 1980s, when hair was big, actress Heather Locklear appeared in a TV commercial for Faberge Organics Shampoo with wheat germ oil and honey.
“It was so good, I told two friends about it, and they told two friends, and so on, and so on, and so on,” Locklear said as the single image of her on the screen multiplied into two, four, nine and finally 16 tiny Heathers.
Word of mouth is a powerful marketing tool. What if the words turn out to be inaccurate?
I have no idea whether Faberge Organic Shampoo lived up to Locklear’s promises. My interest is in a different narrative: the one created by the political class and business leaders, then dutifully promulgated by the news media, on the effect that “uncertainty” was having on the U.S. economy in the months leading up to the fiscal cliff.
Republicans in Congress claimed that businesses were sitting on cash, unwilling to invest until they knew what their tax rate would be next year (as if tax rates are ever set in stone). What’s more, raising taxes on “job creators” would bring the U.S. economy to its knees.
Business leaders were only too happy to adopt the Republican talking points as their own. President Barack Obama offered a middle-class variation, saying the economy would take a hit if Congress failed to absolve that group from automatic tax increases on Dec. 31.
Both business- and consumer-sentiment surveys bore out the depressed mood. The Business Roundtable’s CEO Economic Outlook Survey for the third quarter, released on Sept. 26, showed a plunge in expectations for sales, capital expenditures and hiring over the next six months. The index tumbled to a three-year low of 66 from 89.1 in the second quarter. The results reflected weak overseas demand, but BRT Chairman James McNerney identified “the fiscal cliff and policy uncertainty” as the top factors pouring “cold water on economic planning.”
He should know. As chief executive officer of Boeing Co., McNerney understands that a decision to design and produce a new jetliner will bear fruit years in the future. So when leaders of America’s biggest companies said in late September that they were planning to sit on their hands over the next six months, it should have been a reliable gauge.
Look at what happened in the fourth quarter, specifically in the three areas -- hiring, capital spending and sales -- covered by the CEO survey:
-- The private sector added 675,000 jobs, making it the
second-best quarter since the recession ended in June 2009.
-- Business spending on equipment and software rose 12.4
percent annualized, the biggest increase since the third
quarter of 2011.
-- Business sales rose an annualized 4.2 percent (assuming
no change for December), the strongest quarter of 2012.
Real gross domestic product contracted by 0.1 percent in the fourth quarter, but it wasn’t because of business investment, hiring or sales. A 22.2 percent plunge in defense outlays was the main driver, along with a slower pace of inventory accumulation. So what happened to turn that sour sentiment into action?
“Surveys capture the fears of people, not the transactions,” said Joe Carson, director of economic research at AllianceBernstein LP in New York. “The actual performance and behavior of consumers and businesses was not even close.”
That isn’t to say CEOs purposely provide misleading information. It just means when businesses see an opportunity, they seize it.
The same holds true for consumers. Consumer confidence may have plummeted in December, but it doesn’t seem to have deterred consumers from purchasing big-ticket items, such as cars and computers. Spending on durable goods rose 13.9 percent last quarter.
While I’m not a fan of stripping out all the components that went down to claim an indicator went up, in this case such an adjustment may be warranted. Private final domestic demand -- what U.S. businesses and consumers purchased, both domestically and from abroad -- rose 3.2 percent in the fourth quarter of last year. That pales in comparison with the booming 1990s, but it hardly suggests a recession.
Which brings me to the subject of uncertainty, the presumed source of all things ailing the U.S. economy. Uncertainty is omnipresent. No one speaks of uncertainty during good times. There was lots of uncertainty in March 2000, when the Nasdaq Composite Index breached 5,000 as investors bought shares of Internet companies with no revenue, no profits and, in at least one case, no known business. No uncertainty back then; just a case of irrational exuberance.
In good times, the word uncertainty rarely appears in policy discussions. In bad times, it’s the default setting. Why not call it by what it really is, which is pessimism? When businesses say they aren’t going to invest because of uncertainty, what they mean is, they don’t think their investments will produce a substantial profit.
Uncertainty didn’t carry much weight in the fourth quarter. In fact, it looks like we got snookered by a euphemism that was more an excuse to prevent an undesirable political outcome (tax increases) than a reflection of intent. While Congress dawdled until the very last minute to avert the fiscal cliff, businesses seized the day and went about their business.
With automatic spending cuts and budget negotiations ahead, the uncertainty principle is bound to reassert itself. I hope you’ll remember the gap between fourth-quarter expectations and reality before you repeat that narrative to two friends, who will tell two friends, and so on, and so on, and so on.
(Caroline Baum, author of “Just What I Said,” is a Bloomberg View columnist. The opinions expressed are her own.)
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