The Edgy Optimist

A strange inversion has happened in the past few months: Consumers have gone from being deeply pessimistic about the future to slightly optimistic at the same time that companies have moved from being slightly positive to increasingly negative. That discrepancy is intriguing, and raises the question: Which view will determine the course of the near future? Will the buoyed spirits of people carry the day, or will corporate glumness pull us down?

The evidence that consumers are perking up comes from the multiple consumer sentiment surveys done each month, especially those conducted by the University of Michigan and the Conference Board. The most recent Conference Board survey released earlier this week showed consumer confidence at its highest level since February 2008, while the University of Michigan index of consumer sentiment had surged nearly 30 percent from a year earlier as of late November. The Michigan survey revealed more optimism about the employment situation than at any point since 1984.

Some of the improvement in sentiment indicated by these surveys is clearly tied to a better housing market, with prices increasing across the country. Some of it can probably be explained by just how pessimistic people have been over the past few years. These reports cannot compare how people felt in 1984 with how they feel now. The scores are based on purely subjective questions about how people feel (“Do you think that a year from now you will be better off financially, worse off, or just about the same?”). The change in scores is reflected month by month, but the surveys say nothing about the quality of those feelings over time.

So while the surveys show the most positive results in years, it’s possible that they are only positive relative to how negative people were in 2009, 2010 and 2011, and that compared to the 1980s and 1990s, people aren’t actually feeling so confident. The same goes for income: More people than at any point since early 2008 say their finances are improving; that raises the index. But given that most incomes have been stagnant for the past decade or more, improvement does not necessarily translate into objectively good.

Still, the shift is noticeable, and even more so when juxtaposed with what business leaders say and the steps they are taking. Executives seem fixated on the logjam in Washington and the uncertainty surrounding the “fiscal cliff” and tax rates next year. A Wall Street Journal study of 40 major companies found that more than half planned drastic cuts to their investment and spending through the end of this year and into next year in response to the potential for higher tax rates. Business leaders have been aggressively lobbying in Washington these past weeks to make clear to the White House and Congress that if there is no resolution of the “fiscal cliff” the consequences for business will be dire. That is leavened somewhat by other reports, such as yesterday’s durable goods orders, that indicate more modest contraction. Still, the prevailing sentiment is, as Dupont’s chief executive officer, Ellen Kullman, said, “We’re pulling back … and taking a wait-and-see attitude.” Others have been stark. Said Brian Moynihan of Bank of America: “Uncertainty continues to hold back the recovery. Simply put, our clients tell us they will not be aggressive in times of uncertainty.”

The current business pessimism and consumer optimism is in sharp contrast to the consumer pessimism and business optimism of the past few years. As the overall U.S. economy has struggled and the situation in Europe has been perilous, businesses – especially larger global corporations – have been doing just fine. From 2009 to 2012, the companies of the Standard & Poor’s 500-stock index generated double-digit profits and even healthier revenue gains based on booming business in China, Brazil and other emerging economies.

Now, however, corporate profits are slowing, revenue growth is more of a struggle and the haze of Washington isn’t helping. Having been sanguine about their prospects as the U.S. economy swooned, companies are glum even as economic activity perks up.

Which of these forces will be determinant? First off, consumer sentiment is a notoriously fuzzy gauge of future activity. How people feel in the present rarely correlates precisely with what they spend in the future; the exception has been when consumers stated intentions to buy big-ticket items such as cars. (Possibly, this is because people tend to save in advance. When they say they plan to but a car in the next six months, they have already set their plans in motion,) Still, income levels tend to be a better predictor of what people will spend, along with the value of their homes and the ease of obtaining credit. Given that incomes are stable and slightly growing, homes values are on the rise and credit is easing, it’s a good bet that people will spend a bit more and the overall economic picture will brighten.

As for corporations, CEOs are not particularly good at forecasting. Collectively, they are at best on the cutting edge of conventional wisdom, so when there is anxiety about things like the fiscal cliff, they exude anxiety. And while spending by companies is a key component of economic vitality, spending plans are much more elastic than they were decades ago and can be adjusted more rapidly. That may not be true for building a manufacturing plant, but it is certainly true for hiring and marketing and inventory. So present concerns and stated intentions to cut back could change quickly to exuberance and plans to spend more freely.

It is often said – because it is correct ‑ that you shouldn’t bet against the American consumer. Americans have shown a remarkable and consistent predilection to spend over the years, with only a few notable pullbacks such as during the worst periods of the past few years, when savings increased dramatically and credit-card usage declined. Millions of Americans are unemployed and underemployed, but tens of millions more are employed, gainfully and adequately if not passionately and enthusiastically. Excepting Europe, the global outlook is about as stable as it has been, ever.

While sentiment is just one gauge and its predictive power is unclear, it does underscore a real shift of late in how people view their present and future. Yes, people despair about Washington politics, but that is an old discontent fueled by the issues du jour. And yes, expectations have undoubtedly come down in recent years, as people reconcile themselves to more modest changes and more realistic horizons. But that is a good thing. Shooting for the stars never hurts, but expecting at all times to reach them does none of us any good. Businesses sentiment matters, but it is the consumer – which at the end of the day is we, all of us, you and me – who will power this lumbering collective forward. And for now, that is precisely what they are doing.

PHOTO: Students stand in formation on a field as they form a smiley face in an attempt to break a world record in celebration of the 110th anniversary of their university in Nanjing, Jiangsu province April 27, 2012. REUTERS/Sean Yong

It’s admittedly trite to use the occasion of Thanksgiving to look on the bright side, but given how rarely we cast an optimistic outlook these days, it’s as good a reason as any. With Chapter LXXII of the Middle East conflict playing out in Gaza and the daily soap opera of Washington politics oscillating between sex scandals and fiscal fearmongering, we are once again subsuming the bigger picture to the smaller one and privileging fear.

So, in no particular order, here are six economic points to be thankful for, or at least mindful of, this Thanksgiving:

U.S. housing is on the mend. It took four years, but the long swoon in housing has come to an end. Every housing market metric – new sales, new permits, existing home sales, housing starts and prices – has shown steady and consistent improvement over the past few months. Perhaps the most favorable trend:  The inventories of new and existing homes have fallen sharply and is about half what it was at the housing bubble’s peak in 2007. Of course, there are regional variations, and average prices are far lower than at the peak of the bubble. That is likely to be the case for many years. But a fluid U.S. economy requires a functional housing market that allows people to take new jobs or retire. Housing should not be a pillar of economic growth, as it was in the mid-2000s, but it cannot be an obstacle to growth. The housing market has been a barrier. It no longer is.

The euro zone crisis has receded. Between the spring of 2010 and the middle of this year, the escalating sovereign debt crisis in Europe – epitomized by Greece and equally destabilizing for Spain and Italy – seemed poised to create a global crisis at least on the order of what happened in the fall of 2008. That didn’t occur. Partly, this is because of the efforts of the head of the European Central Bank, Mario Draghi, who labored to guarantee the solvency of the financial system. The result has been a dramatic decline in bond yields for troubled nations like Italy and Spain and a degree of relative calm. Make no mistake, the waning of the crisis is not a cure for the euro zone’s ills. Europe still faces a recession that may even engulf Germany. But the worst-case scenarios of market meltdowns, sovereign defaults and global panic are, for now, off the table.

China is resuming its growth trajectory. After a contraction in 2012 that may cause growth to slow to 7 percent, China completed its once-a-decade leadership transition this month with relative ease. Yes, the leadership is confronting public unease over the corruption and venality of many officials, and yes, the path of spend, spend, spend on infrastructure and housing is not sustainable. Yet there are signs that China’s leaders and hundreds of millions in the middle class understand this; hence the aggressive push to reform the party, build a new social safety net, encourage small businesses and ease the grip of state-owned companies to invigorate the domestic economy. No one knows how this will evolve, but growth next year looks to be stronger and more balanced than it has been in many years.

Unemployment has crested in the United States. For much of 2012, the unemployment situation in the United States has been stable. Far fewer jobs have been created than many had hoped. The 140,000 or so jobs added on average per month barely keep pace with labor supply and new workers joining the workforce. The unemployment rate hovers at 8 percent, which is wonderful compared with Spain’s 25 percent rate, but far higher than Americans expect it to be. The job market, however, is steadily stabilizing, even though there is a structural unemployment challenge that is connected to education levels, globalized labor, and technology efficiencies. Americans are still in some denial of the portent of these changes, and political debate suggests a disturbing belief that the U.S. is only one set of good policies away from massive job creation. The truth may be more complicated, with a generation of unemployed and underemployed workers whose skills are mismatched to an evolving world. This is an issue that will not fade anytime soon, but it is not likely to get worse, barring further global deterioration.

There is a consensus about what needs to be done. A vast gulf may separate America’s political parties – not to mention euro zone nations – but there is less fundamental debate than meets the eye. Almost everyone in the United States agrees that the long-term trends of healthcare spending and defense spending need to be tamed, and there is increasingly less debate about the need for more revenue. Yes, in both Europe and the U.S., there is a divide between those who argue for more pro-growth spending and those who advocate for austerity, and that will keep the fires of debate burning. Yet few disagree about the nature of the challenges.

People outside the media and the Beltway are going about their lives. The echo chamber of politics and the media ratchet up conflict. Stories of compromise and the rolling up of sleeves are inevitably less gripping than stories of brinkmanship and posturing. Conflict is the ultimate drama. So we attend more in our public space to conflict and problems. But people in America are far more focused on families, careers and passions. That provides a foundation for the economy that is often more stable than the forces assailing it. Any journalist can find stories of crippling economic uncertainty forestalling business creation or crimping investment. But it is equally easy to find stories of small business owners getting $100,000 loans to open bakeries or cafés or design firms, or college grads developing niche apps, or retirees adding meaningfully to their communities for modest or no pay. Those stories aren’t usually “news,” but they provide essential ballast.

It’s easy to say, “Yes, but …” to each point above. None of these points negates the well-known risks ahead. There is a list of events that could go wrong, which most of us can recite, from runaway inflation to recession to collapse. In our culture today, however, a litany of problems is met with an “amen” chorus, with people piling on other issues. A listing of the positives is often met with anger. There is no denying the troubling economic prospects for millions of people in many communities. But we can appreciate strengths without ignoring weaknesses, and on Thanksgiving at least, we can genuflect to the former and celebrate what we have.

PHOTO: A turkey waits in its pen at the Seven Acres Farm in the Boston suburb of North Reading, Massachusetts, November 26, 2003.

Barely had the counting ceased in last week’s presidential election when the news took a somber turn. Two of the next day’s headlines read “Back to Work, Looming Fiscal Crisis Greets Obama” and my favorite, “America has Sown the Seeds of Its Own Demise.” Politicians either celebrated or decried the results, but regardless of party affiliation most warned of formidable challenges and a perilous future.

How did it come to pass that even the resolution of a contested election brings almost zero relief from the relentless focus on problems and threats? How did a country that for much of its history exhibited a (sometimes naive) willingness to ignore obstacles and plunge forward become a society that struggles to turn its gaze away from the dangers that loom just ahead? In short, how did the United States become so pessimistic?

Some of it surely has to do with how the past decade has unfolded.  Without question, this has been a challenging time for America and much of the Western world. We can all recite the crises, disasters and failures: Y2K, the bursting of the Nasdaq stock market bubble in 2001, 9/11, Iraq, Afghanistan, Enron, WorldCom, the bursting of the housing bubble, the Wall Street implosion of 2008, the euro zone’s troubles, chronically high unemployment, anemic growth, the continued emergence of China as a global economic force. I could go on.

The bleak attitudes of the past decade are in stark contrast to the giddy optimism of the 1990s, a consequence of the Internet revolution,a soaring stock market and the end of the Cold War. Yet even then, the growth model that so many Americans took for granted was showing signs of strain. Manufacturing jobs were quietly evaporating, and incomes for the middle class were stagnating. And so we have come to a point where even the conclusion of a peaceful, contested democratic election offers no pause in the drumbeat of negativity.

Few today are unaware of the problems that beset us. There is ample informed commentary, analysis and prognostication describing  what is going wrong and could get worse: increasing deficits, waning economic growth, high unemployment, unstable financial systems, stock markets crashes, inflation spikes, geopolitical conflict, renewed recession, destructive gridlock, rising inequality, etc. No one could argue reasonably or rationally against the possibility that these issues will undo us or lead to worse times ahead. The problem, is that few argue consistently or cogently that our fears may, in the end, just be fears and that we will do more than muddle through.

That is the goal of “The Edgy Optimist,” my new column. It will examine what might go right and how, and what is going right and why. To deny the challenges and perils of our world, particularly the changing nature of our material and economic lives in the West and how we can ensure sustainable prosperity and growth in the years to come ‑ well, that would be foolish. But it is equally wrongheaded to dismiss arguments to the contrary as foolish, unlikely or ill-informed. Behavioral psychologists have shown that when people feel fearful, anxious or pessimistic, warnings about the dangers that lie ahead sound smarter and wiser than alternate views that suggest more constructive outcomes. Alliance Bernstein recently sent a note to clients charting how the Dow could quietly reach 20,000 within five years. The reaction? Anger and outrage. Bernstein was flooded with complaints that they were naifs. Had they released a paper with the title “Dow 5000” they likely would have generated just as much reaction, but from clients wanting to know how to prepare for what seemed like a credible scenario.

None of these outcomes can be known, by any of us, of course. Some seem more credible because they reinforce our view of the present, but unless you give a date at which all goes to hell, no argument about future peril can be falsified. This column won’t change the minds of those convinced that the road ahead leads down, but it will at least offer an alternate view about what is possible ‑ without donning rose-colored glasses or ignoring the risks.

That brings us to the election and the reaction. You would think the fate of the U.S. economy hinges on the election and that what government does will be the prime determinant of whether America rises or falls in the next few years. Yet government is only one piece of the three-dimensional chess game that is our economic system.

Yes, it accounts for as much as $6 trillion of the approximately $16 trillion of U.S. economic output. Much of that $6 trillion is necessary and productive ‑ it pays for schoolteachers, firemen, police, Federal Aviation Administration controllers. But even if you write that off as less productive spending, that leaves $10 trillion that has nothing to do with government.

And what about government regulation? There, too, the emphasis is almost entirely on costs rather than on the uncalculated benefits. But what is added to overall output by a judicial and legal system that enforces contracts? What boost is there to output because of rules against excessive pollution that reduce the healthcare expenses that would be required to treat those harmed? We are very good at looking at the inefficiencies and calculating the harm of over-regulation. We are less adept at weighing those against the benefits.

Non-governmental activity remains incredibly dynamic. With that comes the vertigo of rapid change and disruption. So much of the structurally morphing labor force is a function of disruptive technologies and the various forces of globalization. These forces have led to stagnant wages in countries such as the United States, Japan and Europe, while China, India and much of the rest of the world begin to make more.

That need not be a recipe for despair, nor proof that the future is grim for those societies. The flip side to the struggles of the developed world is billions of people entering the global middle class. Also, a porous global system has and will continue to yield benefits. (Whether our macroeconomic statistics and indicators are designed to measure that is another matter.) All those iPhones and iPads are possible only because of the fusion of American intellectual property and Chinese manufacturing ‑ as the recent focus on working conditions at Apple’s manufacturing contractor Foxconn has powerfully shown.

The election and the looming “fiscal cliff” have managed to add to general anxiety, but one is a validation of a functional political system and the other is a problem with obvious solutions. That makes the present challenges enviably easy to meet, whether they are met or not. No one can say what the future holds, but the chances that it will see our fears realized only increase when the consensus is that they will be. We know the risks; it is time to pay attention to the possibilities.

PHOTO: Confetti obscures the stage as U.S. President Barack Obama celebrates after winning the U.S. presidential election in Chicago, Illinois, November 7, 2012. REUTERS/Philip Scott- Andrews