If you ask Liz McDermott about the economy, she’ll say she’s worried about the wild gyrations of the stock market, the budget impasse in Washington, and the European bank crisis. If you ask her about shopping, she’ll tell you about the Manolo Blahnik alligator slip-ons she bought at Neiman Marcus (NMG) in September for $3,000, the $2,000 she dropped on a silk pantsuit from Ralph Lauren (RL), and the $6,000 she paid for four dresses at Michael Kors. “In 2008 I stopped spending and went under the radar,” says McDermott, who runs an interior decorating company in Atlanta. “Now I think we have all come to terms with the economy, and we understand our limitations.”
Like many Americans, McDermott has an urge to shop that’s overriding her anxiety about the economy. While household sentiment stands at levels typically seen during a recession, increased spending in the third quarter boosted growth to the highest level of the year, Commerce Dept. figures show. Total consumer spending, which accounts for about 70 percent of the U.S. economy, rose 2.4 percent last quarter, the fastest this year. Retail sales increased 1.1 percent in September, the most in seven months, and vehicle sales climbed 3.6 percent, the most since March 2010.
Confidence surveys tell a different story. The Bloomberg Consumer Comfort Index for the week ended Oct. 23 fell to the lowest in a month, and 95 percent of survey respondents had a negative view of the economy, the worst figure since April 2009. The Conference Board’s sentiment index fell in October to the lowest point since March 2009. The Thomson Reuters/University of Michigan gauge of consumer expectations for six months from now is near its lowest level since May 1980.
The schism reflects consumer frustration with the government’s failure to reduce unemployment and stem rising deficits, says James Paulsen, chief investment strategist at Wells Capital Management. “There is a lot of anger out there,” Paulsen says. “Consumers are scared to death, but they are still spending.” Confidence surveys may also be less useful these days because wealth is more concentrated, says Omar Saad, an analyst at International Strategy and Investment Group (ISI). The top 20 percent of income earners, who make more than $100,000 a year, may account for more than half of household spending, and they are underrepresented in the confidence gauges, he says.
Federal Reserve Chairman Ben S. Bernanke on Nov. 2 said that he is discouraged that “consumer confidence is about where it was in the depths of the recession.” That, he said, could “be a drag on consumers’ willingness to spend and to invest.” Over the past two decades, Fed researchers have disagreed about how much importance to give confidence indexing. While some scholars say they can improve forecasting, former Fed researcher Jean Kinsey has compared measuring confidence to a mild cold. “You can’t afford to ignore it, yet it doesn’t seem to change things very much,” she wrote in a 1993 report for the Minneapolis Fed.
Not surprisingly, the wealthy are more upbeat about the economy than the poor are. U.S. households making at least $50,000 averaged more than 50 percent higher confidence in the past three months than those making $15,000 to $24,999, according to Conference Board data. All three sentiment measures dropped in August, following protracted wrangling between President Barack Obama and Congress over the debt ceiling. “Concerns about the long-run deficit picture or how the U.S. fiscal situation is going to get resolved are real and valid,” says Dean Maki, chief U.S. economist at Barclays Capital (BCS) in New York, who researched household finances at the Fed from 1995 to 2000. “But they are not the types of issues that make a consumer decide not to buy a shirt this weekend.”
Some economists worry consumer pessimism may presage faltering spending ahead. “We dodged a bullet in the third quarter,” says Robert Dye, chief economist at Comerica (CMA) in Dallas, who correctly forecast the rise in third-quarter gross domestic product. “My concern is that the pace of consumer spending is not sustainable. Consumers are constrained by weak wage incomes, and they’re not going to drive their savings rate down to zero.”
Consumer goods manufacturers and retailers are struggling to make sense of the low level of sentiment. “We’ve got these conflicting tensions out there,” Newell Rubbermaid (NWL) Chief Executive Officer Michael Polk said during a September meeting with investors. At luxury goods maker Coach (COH), CEO Lew Frankfort feels consumers are “cautious and concerned.” But unlike 2008 and 2009, “there isn’t a feeling that the bottom is going to fall out,” Frankfort said during an Oct. 25 call with investors.
Frankfort and others note that the economic pain has spread very unevenly. While the unemployment rate has been stuck at about 9 percent for 30 consecutive months, the rate for earners with at least a bachelor’s degree was 4.2 percent in September, compared with 14 percent for people without a high school diploma. “If you’re comfortable and are on the high-income side of the equation, you’re back to buying luxury items,” Steven Burd, CEO of grocery chain Safeway (SWY), said in an Oct. 13 conference call with investors. Everyone else is “really careful about how they spend.”