Confidence game: Are consumers still playing by conventional rules?

As consumer outlook surveys chart plunging numbers, some experts are noticing that the trend coincides with President Bush's declining approval ratings. Could it be that the public's view of the economy is more closely linked to the political climate than researchers thought? This powerful crosscurrent of economic, sociological and political thinking presents a new challenge. Economists must now determine whether the confidence numbers are a short-term blip or the signal of the beginning of a downward trend.

When consumer confidence tumbled again in April, most coverage focused on the ostensible contradictions between nose-diving numbers in the public's economic outlook and skyrocketing numbers in U.S housing sales. But Earl de Berge, research director for the Phoenix-based Behavior Research Center, found a more interesting juxtaposition of numbers.

Noting that President Bush's approval ratings are plunging, de Berge said, "This is the first time I can remember where the administration's ratings and consumer confidence are falling at the same time." The simultaneous dive in presidential approval and consumer comfort has de Berge and others wondering what's going on. "It's more than economics this time," de Berge says. "Consumer confidence indices may be more linked to politics than we usually think they are."

That sinking feeling

Whether you looked at the University of Michigan's Index of Consumer Sentiment, the Conference Board's Consumer Confidence Index or results taken by local pollsters, April's falling numbers represented at least a three-month free fall in consumer comfort.

The Conference Board's Consumer Confidence Index dropped to 97.7 in April from 103 in March. During the same interval, that organization's Present Situation Index dropped from 117 to 113.6, and its Expectations Index plunged from 93.7 to 87.2.

These are the lowest numbers the Conference Board has reported since last November, when the Consumer Confidence Index was at 92.6 and the Present Situation Index was at 96.3. April's 87.2 on the Expectations Index is the lowest figure seen since July 2003. Clearly, consumers aren't anticipating a rosy economic future anytime soon.

The Michigan Consumer Sentiment Index also shows a downward trend, falling to 87.7 in April from 92.6 in March - an almost 5-point decline. Michigan's Index of Consumer Expectations dropped to 77 for April 2005. It was at 82.8 in March.

Going back 35 years, the long-term average for Michigan's Consumer Sentiment Index is about 88, says Lee McPheters, professor of economics at the W. P. Carey School of Business. "None of these numbers are crisis indicators," he says, adding that the dip in indices is "consistent with consumers getting a little more cautious about their role in the economy."

Presidential plummet

If you're painting a portrait of national feeling by the numbers, though, the president's recent approval ratings add interesting color. Fox News produced the only major survey results where a greater percentage of survey respondents approved of Mr. Bush than those who disapproved in April.

According to the Fox News/Opinion Dynamics Poll taken at the end of that month, 47 percent of respondents still give Bush a nod of approval as opposed to 43 percent who disapprove of the president. That approval rating is only down by 2 percentage points from March. But the number of people unsure about the president's performance has doubled, from 5 percent in March to 10 percent in April.

Meanwhile, The ABC News/Washington Post polls taken in March and April show Bush's approval ratings dropping from 50 to 47 percent of survey respondents, which matches the lowest score Bush has achieved in either of his two terms in office. Comparing CNN/USA Today/Gallup Poll results from mid-March and mid-April also shows a presidential approval decline — this one from 52 to 48 percent.

According to de Berge, polling results in Arizona usually reflect the state's boom economy and, therefore, consumer outlooks tends to be more positive than those seen in national surveys. But de Berge's recent research shows Bush's job ratings "at their lowest level since he first assumed office."

Among de Berge's notable survey findings for April:

• 45 percent of respondents believe President Bush "does not understand the needs of people like themselves." Only 34 percent of survey respondents think he does.
• 48 percent of Arizonans gave Bush a thumbs-up on Iraq in January 2004, but only 41 percent did so in April 2005.
• Simultaneously, the number of people who rated Bush's management of Iraq as "poor" rose from 31 percent in January 2004 to 38 percent in April 2005.

And remember, Arizona is a red state. It's Bush country. "I think that consumers are playing in political views more than we usually see them do," de Berge says. "Maybe they don't feel that the grand expectations they had with respect to curtailing terrorism and exporting democracy are sticking to the wall."

Dennis Hoffman, professor of economics at the W. P. Carey School of Business, agrees. "I watch the pace of our economy almost daily," he says. "These survey results come in sharp contrast to some of the underlying things that I'm seeing" in Arizona's robust revenue streams, employment outlook, expectations of housing sales and more.

The coincident plunge in presidential approval and consumer confidence has de Berge wondering if "people are making connections now that they don't normally [make]," and perhaps making judgments that are not necessarily fair or accurate. Specifically, he wonders if the drop in approval of Bush's policies has people saying, "If I don't feel comfortable about Iraq any more; maybe I should rethink how I feel about other issues."

But de Berge is quick to add that presidential approval may not be the only factor at play. Sticker shock at the gas pump could also be involved, he says. Hoffman and McPheters echo that belief. "When you go to the gas pump and prices are higher than you've seen them in recent memory, you begin to wonder about the economy," McPheters says.

"What I'm rattled by is that it is uncertain what impact high oil prices will have on the economy," Hoffman adds.

Energetic displeasure

Survey results on consumer reaction to energy prices don't portend good news for the economy or the president. Asked if they approve or disapprove of the way Bush is handling energy policy, 54 percent of respondents said they "disapprove" in an ABC News/Washington Post poll conducted April 21-24.

The same poll found that 64 percent of people said increases in gas prices had caused "financial hardship" for their households, and 62 percent felt Bush is not "handling energy problems effectively." Almost a third - 31 percent - blame the Bush administration for the rise in oil prices in the first place.

"Maybe people see high gas prices and they're fuming when some pollster calls," Hoffman says. Other reasons for dissatisfaction he sees could be concern over the proposed Social Security overhaul, dissatisfaction over the war in Iraq and the rising number of taxpayers caught short by the Alternative Minimum Tax, which essentially socks a taxation surcharge on more taxpayers each year.

Regardless of the cause, the declining consumer confidence we're seeing is significant, Hoffman notes, and it's something to watch. "Even though consumption patterns don't always follow consumer confidence, it's pretty highly correlated."

Predictions and reflections

"I'd be surprised if consumer sentiment was going up in a period where interest rates are gong up, gas prices are going up, and job growth continues to be sluggish," says McPheters. He points out that the drop in consumer sentiment simply "shows consumers are reading their newspapers and paying attention to economic indicators," but he also notes that because consumer purchases make up about two-thirds of the U.S. economy, consumer unease and caution can "create a self-fulfilling prophesy."

And what about those red-hot housing numbers? Won't the continued strength of the U.S. housing market come to our rescue? Probably not, according to Hoffman and McPheters. Both professors note that housing increases could be caused by increased investor activity in that market, and survey results from the National Association of Realtors backs them up. The Realtors' data showed that 23 percent of homes purchased in 2004 were bought as investments and 13 percent were vacation homes.

Besides, buying a house is a little different than buying a new lawnmower at Sears. "Consumption — people buying goods and services — has been the key driver that has sustained the U.S. economy ever since the recession of 2001," Hoffman says. "It's been consumers that pulled us through."

Adding that the U.S. is the world's consumer, Hoffman concludes, "there would be a pretty sharp economic correction" worldwide if U.S. consumers suddenly kept their money to themselves. "When the confidence index wavers, economists get a little nervous. It makes us rethink our forecasts for the future of economic activity."

Hoffman adds that the challenge economists now face is determining whether there is currently a short-term blip in confidence numbers or the figures signal the beginning of a serious downward trend. Pointing to the powerful crosscurrent of economic, sociological and political thinking reflected in consumer confidence indices, Hoffman admits, "It is a fascinating time to be trying to figure out the future course of the U.S. economy."