Dennis Jacobe thought he saw a new economic attitude budding this May. For some time, Jacobe, the chief economist of polling company Gallup, has been tracking what he calls the “new normal” among consumers. That’s a state characterized by lower spending, lack of faith in institutions such as banks, concern over personal financial well-being — and a widespread sense that such conditions will continue for the foreseeable future.
In May, however, Jacobe “saw something relatively surprising.” Consumers suddenly began opening their wallets again — something they hadn’t done in the past year and a half, Jacobe told an audience at the CFO Core Concerns conference in Baltimore on Monday.
“When we came to May, the numbers really escalated,” said Jacobe, who took that as a sign that “frugality fatigue” was setting in. “People are getting tired of not spending,” he said, adding that those in the upper-income brackets were finding it particularly tiresome to continue keeping a watchful eye on expenses. And while retailers didn’t report a similar uptick in May, Jacobe said other types of discretionary spending, such as vacations, suddenly spiked: “People started to believe the financial crisis was over.” Indeed, the month before, some 54% of those surveyed said they felt positive about their financial well-being, a sentiment Jacobe ascribed in part to the amount of debt shed by consumers in recent times.
Alas, the good feelings were short-lived, quickly blunted by the stock market’s dismal performance in May and growing concern over the financial stability of Greece and other European countries. “Spending has gone right back down after that May increase,” said Jacobe.
For now, then, the new normal continues, with consumer confidence still badly shaken by what Jacobe said was a “psychological shock to the populace that has changed behavior.” Some 47% of people continue to say they are spending less, he noted, and two-thirds say that is going to continue.
During the height of the financial crisis in 2008, said Jacobe, 80% of people polled said the economy was getting worse. “It’s very rare that 80% of the population agree on anything,” he observed. And although that number had dropped to 56% in May, it still represents more than half the population (see chart below). “That’s a very long-term sentiment,” said Jacobe. “People’s perceptions of the economy are actually getting a little worse, though [they have been] fairly flat over the last year and a half.”
Only 20% of respondents said they had confidence in their banks, observed Jacobe. Meanwhile, underemployment stabilized in May 2010 but “remains very high.” According to Gallup, the percentage of people who are unemployed or working part-time jobs while looking for full-time work is 19%. “That’s almost one in five Americans — a very high number,” said Jacobe.
Small businesses share much the same sentiments as individuals. While their confidence in their banks was marginally higher, a majority of owners of small businesses with less than $1 million in revenue said they are cutting back on spending, while 42% said they plan to borrow less money. Among firms with $5 million or less in revenue and $100 million or less in revenue, said Jacobe, “we saw much the same pattern: spending less and borrowing less.”
Beyond financial perceptions, Jacobe also noted a number of other public sentiments that are likely to shape the economic landscape. For example, he said, President Barack Obama’s approval rating is down to 45%, “which is a pretty low number for a President in this stage in his presidency.” Just 20% approved of Congress, he added, a number that is “usually a very bad sign for incumbents.” That’s potentially bad news for the Democratic President and the majority party, but other numbers offer equally dispiriting news for conservative antitax or antiregulation agendas. For example, noted Jacobe, 63% of Americans expect taxes to go up, while 62% believe that upper-income individuals and corporations pay too little in taxes.
Moreover, Jacobe said, current public sentiment suggests that corporations face a “huge amount of regulatory risk.” The recent BP oil spill, he said, has “outraged” the populace. “You start to see a situation where people are more supportive of regulation than they have been in the past.” Indeed, he noted, current Gallup numbers show, paradoxically, that 86% of Americans approve of free enterprise, but 36% approve of socialism. Asked by the audience to explain the apparent contradiction, Jacobe replied, “I can only propose that economics professors no longer teach what those words mean.”
As for what all this means for business, Jacobe urged the audience of finance executives to focus on organic growth by increasing engagement with existing customers and with their best employees. “People are improving their personal balance sheets; companies are improving their balance sheets,” he said. “If we can grow, even slowly over the next few years, we can do so on a much more solid basis instead of this boom-and-bust of the past few years.”