Consumer Sentiment: Why So Down?

I like reading The Economist both for the dry British style and the coverage of topics that are ignored by most American publications. Frequently I disagree with their editorial positions — but their thought process is always interesting.

This week’s “leader” (as they call their editorial columns), Unhappy America, included an interesting statistic. “Many Americans feel as if they missed the boom. Between 2002 and 2006 the incomes of 99% rose by an average of 1% a year in real terms, while those of the top 1% rose by 11% a year…” The story did not mention a source, but if it’s accurate this figure tells us a lot about the state of consumer sentiment in the U.S.

Now if you happen to be in the top 1%, you probably feel like you deserve what you’ve earned. Maybe you are right. Nonetheless, it is not hard to see why a big part of the public is feeling a little grumpy and maybe even frightened. The 1% income growth was probably not static over the whole population. Within the bottom 99%, some had income growth of better than 1%. For some it was worse, or even negative.

As the magnitude of their problems becomes clear, people respond in their spending decisions. This is why, for instance, today’s S&P/Case-Shiller home price index dropped -15.8% in the last year and consumer confidence stayed near its lowest level since 1992. It is why the parent company of Bennigan’s and Steak & Ale restaurant chains closed their doors and filed bankruptcy today. They were between a rock and hard place. They could not raise prices because consumers are not in a spending mood. They couldn’t lower prices to stimulate traffic because they are burdened with huge debt. Millions of individual Americans are in a similar position. Banks are not the only industry in trouble.

The American economy has been through bad times before and come back stronger than ever. No doubt it will do so again this time. Yet for many, the journey from here to there will be long and painful. Don’t be surprised if some people begin to look for a better way.