Consumer Confidence Improves, but Dark Clouds Loom

During the Great Recession, a pervasive feeling of doom settled over the American public. Jobs were disappearing, incomes were shrinking, markets were down, and prospects for growth were slim. Each day seemed to bring more bad news.

[See 50 Ways to Improve Your Finances in 2012.]

This negative sentiment is a reflection of consumer confidence, an economic indicator that measures how people feel about the state and direction of the economy, as well as their own financial well-being. It is measured by a number of indexes, the most popular being the Conference Board's Consumer Confidence Index.

This index is measured by asking 5,000 households how they currently feel about the economy and their own personal finances, and what they believe the future holds for their own finances and the broader economy. The Conference Board then quantifies the answers to these questions, creating a scale on which high numbers mean optimism and low numbers indicate pessimism.

The index indicated widespread negativity throughout the Great Recession. But with recent news of growth, consumer confidence has made a bit of a comeback.

Maintaining this confidence will be key if the recovery is to continue. The mood of the country directly affects how U.S. consumers manage their finances. But this optimism might be misplaced, as bad economic news potentially looms in the future.

[See How the Savings Rate Could Hobble the Economic Recovery.]

A rebound in optimism, but worries persist. Ken Goldstein, an economist at the Conference Board, says that while the index has shown increased optimism recently, it's still well below typical levels for economic recovery.

"In about three weeks, we're going to approach the three-year anniversary of the end of the recession," Goldstein says. "We're in the range of about 70 right now. We're well below where we would see in a normal recovery, when the index is typically 90 to 100."

Goldstein says the unbalanced nature of the recovery--businesses are doing well, but wage growth is stagnant and the economy isn't adding jobs--is the primary reason for the measured outlook.

"This number is perhaps a reflection of current reality. It's a combination of the lack of job growth along with the lack of income growth," he says. "Given that combination, it's a surprise [confidence isn't lower]. The last few months have been very disappointing."

Still, Goldstein believes there will be improvement in confidence as the year progresses. "The real question is, 'Can we regain economic momentum?'" It looked like that's where we were going earlier this year," he says. "We've hit the two-month pause button. My guess is we're going to restart it."

Misplaced hopefulness. According to Jenny Darroch, a faculty member at the Peter F. Drucker School and Masatoshi Ito Graduate School of Management at Claremont Graduate University, much of this positive feeling is misplaced. She says that while the U.S. economy has shown signs of improvement, there are many steps remaining toward complete recovery and robust growth.

[See 7 Threats to Your Retirement.]

"If you look globally and you look at what's happening in Europe, if we look outside the United States and accept that we're part of a global network, there is a real potential for danger," she says, referring to the continuing European debt crisis. "The pressure is coming off here a little bit in terms of the positive way the media is talking about the economy. People are clutching anything that indicates the economy is improving."

Darroch says this fever for positivity is fueled by a desire to return to optimism. "It gets so depressing. You feel like you don't do anything, you can't spend any money," she says. "There comes a time that people want to get on living their life. They don't want to live in fear of the world collapsing."

But according to Darroch, the danger in false optimism is that consumers repeat the same mistakes--overconsumption, reliance on debt, owning homes beyond their means, and failing to save--that led to the Great Recession.

"At some point we need to feel as if we're moving forward again, but I fear that we haven't learned anything," Darroch says. "It's in our DNA that consumption is a good thing. If you look around at what we think normal is, the size of the house we own, how many TVs are in the house, how many cars we need, our definition of 'normal' is different that other cultures."

Adds Darroch: "The goal should be to have wise consumption that propels the economy forward without repeating the mistakes of the past."



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