Are we in a period of gloomy growth? An era in which Americans are pessimistic and sour but buying more anyway?
The Conference Board reported Tuesday morning that consumer confidence declined in July for the second straight month. Worse, consumers’ expectations for the near future declined sharply. “Concerns about business conditions and the labor market are casting a dark cloud over consumers that is not likely to lift until the job market improves,” said Lynn Franco, director of the Conference Board’s Consumer Research Center.
And yet there are signs that back-to-school shopping isn’t going to be a disaster. Each week, the International Council of Shopping Centers and Goldman Sachs release a weekly index for chain-store sales. In the most recent week, sales rose 0.6 percent from the week before and were up 3.8 percent from the year before. Sales have risen from the week before in six of the last nine weeks; and over the past two months, weekly sales have been up between 2.5 percent and 4.2 percent from the year before.
Several years ago in Slate, I looked at the relationship between consumer confidence and consumer activity, and it’s a tricky one. Confidence and expectations can help predict future behavior, but they’re not foolproof indicators. As I noted, “Every recession in the past 40 years has been preceded by drops in consumer confidence. (Although not every drop in consumer confidence has presaged a recession.)” At that time, in the fall of 2002, consumer confidence had slumped for four straight months—and yet the economy was still in the first year of an expansion that would last more than six years. In theory, it’s possible for consumer activity and spending to rise even as consumer confidence declines, and it’s possible for spending to decline as consumer confidence rises.
The reality analysts are confronting today is that business cycles and recoveries are lumpy. If you construct a chart of quarterly change in GDP (click here), the pattern more closely resembles a saw than a straight line. During expansions, the rate of growth can rise and fall. And so a decline in the rate of growth of the economy, as we saw in the first quarter (and as we’re likely to see when the advance second quarter reading comes out on Friday), doesn’t necessarily presage a recession. A decline in retail sales, as we saw in June, according to the Census Bureau, doesn’t necessarily presage further weakness. (What’s more, retail sales in the first half of 2010 were up strongly from the first half of 2009.) Check out a time series of monthly retail sales data, and you’ll see plenty of months in the middle of strong expansions in which retail sales fell.
Such fluctuations of weekly, monthly, and quarterly data aren’t unique to this business cycle. But the interpretation of them may be. Most adults today came of age in the modern era of long business cycles. As the National Bureau of Economic Research’s recession dating committee shows, the last three economic expansions have lasted 108, 128, and 81 months, respectively. Between November 1982 and December 2007, the economy was contracting for only 16 months. The thought that a recession could drag on for nearly two years, that the economy could shrink at a 6 percent annual rate, that the economy could shed 700,000 jobs per month for several straight months—it simply didn’t enter our collective mind. But now that we’ve lived through the traumatic events of 2008 and 2009, the knowledge that really bad things can happen remains with us.
Muscle memory exerts a powerful influence on economic behavior. Government bond interest rates hovered at high levels through the 1980s and early 1990s, even though Federal Reserve Chairman Paul Volcker had long since slayed inflation. Investors burned in the 1929 crash avoided the stock market for a generation. For the same reason, companies that experienced a near-death moment in the fall of 2008, when the credit markets seized up, continue to hoard cash today, and consumers burned by excessive debt continue to pay it down. I’d argue that our collective muscle memory now includes the knowledge that the economy can come close to collapse. It makes consumers feel wary, even as they open their pocketbooks.
A version of this article also appears in this week’s issue of Newsweek.