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PAUL SOLMAN: "Animal spirits." It’s a famous phrase in economics, used to describe confidence or optimism as the energizing force that keeps a market system bounding ever upward.
Even the stock market is usually spoken of in animal terms: Bullish, of course for up. (This fellow here has had his horns removed.) Or bearish for down. (This is Ida.) The term "animal spirits" was actually coined to help explain an historic event, a behavioral crisis among us supposedly higher primates: The Great Depression.
In the 1930s, economist John Maynard Keynes analyzed the Depression as a failure of confidence, an emotional depression if you will, in which consumers had become afraid to spend; businesses — as a result — afraid to invest.
"Economic activity," Keynes wrote, "can only be taken as a result of animal spirits — of a spontaneous urge to action rather than inaction. If the animal spirits are dimmed and the spontaneous optimism falters… enterprise will fade and die."
PAUL SOLMAN: In the spring of 2001, flagging animal spirits — or confidence — of consumers, investors, even entrepreneurs, has become a major source of worry. So we asked economist Albert Wojlinower to join us at New York’s Central Park Zoo. Over the years he’s been called Dr. Doom, Dr. Gloom, even Dr. Death, for his willingness to predict economic downturns. Is he bullish or bearish?
ALBERT WOJLINOWER: I’m moderately bullish at the moment, but I would be bearish for the, let’s say, for a year out from now.
PAUL SOLMAN: Confidence, economists think, tends to move in waves. Even when consumers get excited and exuberantly spend, it’s a leap of faith, an act based on confidence in the future. That future depends on entrepreneurs, and yes, entrepreneurs are usually optimistic…
ALBERT WOJLINOWER: But the people who have to lend and invest are a little more cautious. And you really need a wave of optimism to catch them up in the idea that they should risk their money on ventures which really are unpredictable as to their outcome, and also where we know from history that the majority will not succeed.
PAUL SOLMAN: In short, we humans can be as skittish as almost any species, which is why so many pay so much attention to the two monthly consumer confidence indexes: One from the University of Michigan, the other from this place, New York’s Conference Board. In recent months, this consumer confidence index has fallen to 100, down from a record high of 140. Lynn Franco oversees The Conference Board survey.
LYNN FRANCO, The Conference Board: We ask consumers to appraise current business conditions and current employment conditions. And then we ask them their expectations six months out regarding business conditions, employment and personal income prospects. And, especially over the last several months, the expectations component really was dragging the index down, and that’s at levels associated with, you know, normally what we see prior to a recession.
PAUL SOLMAN: Thus the anticipation of this month’s number. If the expectations component were to rebound, it would suggest the recent drop in confidence was a blip. If it were to sink further, we could be heading for a recession, by definition a half year or more of a shrinking economy.
The Conference Board hires NFO, a research firm, to survey a representative sample of 5,000 Americans every month. About 3,500 usually respond — among them in the most recent survey, suburban Connecticut school teacher Susan Geller a regular NFO respondent.
SUSAN GELLER, survey respondent: I fill this out every month. It could be about cars, it could be about grocery shopping.
PAUL SOLMAN: Do you get these cards in the mail and embedded in those cards are questions about consumer confidence? Are you aware of that?
SUSAN GELLER: No. I just filled it out knowing that they’re looking for something, but I’m not aware of what they’re looking for.
PAUL SOLMAN: So you’re not going, "Oh, here’s the consumer confidence."
SUSAN GELLER: Oh, no, not at all.
PAUL SOLMAN: At this point, let’s get you in the act. Grab a pencil or paper, or log on to www.pbs.org/newshour where you’ll see a link to our Web version of the five-question consumer confidence survey. We’ll keep it up all week.
The two current questions: How are current business conditions: Good, normal, bad? How about current employment? Good, normal, bad. Now the three expectations questions, which look six months ahead. Will business be better, do you think, the same or worse? Jobs? More, the same number, or fewer in six months from now. Finally, your income. Higher, same, lower? We’ll keep score on the Web site.
Susan Geller’s expectations meanwhile, in line with the much-hyped plunge in confidence, were low. Of business conditions…
SUSAN GELLER: Between the gas prices at the pump, between what I paid for gas, natural gas — and that’s what heats our house — what I discuss with the teachers at school around the lunchroom table, I see fear. I see uncertainty.
PAUL SOLMAN: As to Geller’s expectations about jobs…
SUSAN GELLER: I don’t feel so good about it. I don’t see as I go down the local streets, the Post Road in Fairfield, I don’t see the usual signs looking for employment.
PAUL SOLMAN: But how about the current job situation?
SUSAN GELLER: That I think is good. Everyone’s employed. I don’t know people… I don’t know if I know anybody who is not employed.
PAUL SOLMAN: Including, of course, herself and her husband Ben, a dentist. So Geller thinks current conditions are fine. And even though she expects them to deteriorate, she’s spending as much as ever. That’s evidence to Lynn Franco, that when analysts predicted a recession based only on the expectations component of the consumer confidence index, they were being too hasty.
LYNN FRANCO: It was, you know, recession, recession, recession. And then when consumer spending held up, it was kind of, well, look, you know, consumer confidence is not matching what’s really happening when, you know, we’ve been saying all along take a look at the two components. The present situation is telling you that consumer spending is going to hold up. The expectations, you know, it’s a little bit more driven kind of by external factors.
PAUL SOLMAN: External factors like the oh-so-public swoon of the NASDAQ, dipping again when we surveyed Times Square, crossroads of the world. But there were also hints of optimism. No wonder, then, that the future is blurry. So is the recent expectation number a distorted reflection of the future, or a clear one? Economist David Wyss.
DAVID WYSS, Economist, Standard & Poor’s: It’s a pretty clear indicator of what people are going to spend. Whether they’re right or not about where the economy is going, it’s what they feel. And if they feel scared they’re not going to be out there spending money.
PAUL SOLMAN: And that’s the key? I mean, because this economy is so driven by consumer spending?
DAVID WYSS: Two-thirds of this economy is consumer spending. If they stop spending, this economy goes into the tank. There’s no other way to do it. The scary thing right now is this consumer spending boom is very much a spending boom by the rich. And with the stock market going down, they’re just getting a lot more nervous.
PAUL SOLMAN: In other words, Wyss worries mainly about expectations of the well off, expectations which, if they continue to slide, could affect the current condition of the economy as a whole. What is your confidence level? A couple years ago it was 100. What is it today?
WOMAN: What is it today? Maybe it’s 50.
PAUL SOLMAN: 50.
WOMAN: 50 to 60.
PAUL SOLMAN: 50 to 60? But you’re still shopping at Saks. How do you explain that?
WOMAN: How do I explain that? I work hard and I wasn’t extravagant. If you look in my bag, it’s nothing major.
PAUL SOLMAN: Nothing major.
WOMAN: Nothing major.
PAUL SOLMAN: May I? It’s like… Yeah, that’s a small item.
PAUL SOLMAN: On Broadway’s half-priced tickets line, more signs that current conditions are getting iffy.
WOMAN ON STREET: My husband lost his job two days ago. So I’m not feeling too… I’m not feeling too optimistic right now.
WOMAN ON STREET: A friend of mine in advertising has been let go already. It’s, like, 20 percent of the people at a particular advertising firm were let go already.
PAUL SOLMAN: Is that right?
WOMAN ON STREET: Yeah.
PAUL SOLMAN: So we asked, how about six months from now? How many people are confident about how it’s going? Raise your hands. How many people are not confident about how the economy is going? That’s a raising McDonald’s cup there, right? So almost everybody not confident.
PAUL SOLMAN: On the other hand, at the full price line for the hottest ticket in town, the economy was looking good. So how many people good? Just what you’d expect, perhaps, from folks eager to pay $100 to see "The Producers." But then, how does it square with the other ticket line?
DAVID WYSS: Everybody is different and everybody is seeing this from a different angle. Sort of like the blind man and the elephant. To some people the economy looks just great because their jobs are fine and their friends’ jobs are fine and they’re doing well. Other people, if they’re in dot-coms or if they’ve been working in the automobile area, for example, you’re seeing sharp cutbacks in the employment; they’re not feeling nearly as happy.
PAUL SOLMAN: Then there were those eating at Carmine’s. So look at these people. Hi, how are you? They all look like they’re perfectly prosperous. Every seat is filled there. Not wanting to intrude, we jotted our question: How confident are you about your personal finances? We got our answers in percentages.
PAUL SOLMAN: 90 percent? You guys? 95. 95. They’re up. They’re all good. They’re doing great. You’re going to go higher? Going to go higher. So this is a sign of consumer confidence.
DAVID WYSS: People are still happy. Of course they’re having a good meal, so they’re probably a little happier than they were an hour ago.
PAUL SOLMAN: So you wouldn’t put too much stock in these kinds of data?
DAVID WYSS: Well, you know, these are anecdotes. As one of my professors said, the plural of anecdote is data.
PAUL SOLMAN: Anec-data. Thus then, the importance of more scientific surveys like the consumer confidence index. Alan Greenspan and the president have it secretly faxed to them the last Monday of every month. The next morning, the rest of us get it. The markets then react immediately.
But economists tend to track the animal spirits that move economies like ours longer term — dampened these days, perhaps, by those who took the plunge on Internet stocks and still haven’t come up for air, but are actually waiting to be buoyed by the next wave of promising technology, a wave of new optimism and confidence. Or so says Dr. Wojlinower.
ALBERT WOJLINOWER: That’s how good things happen. Good things happen because optimistic people do crazy things. Some of the crazy things don’t work out so well, but some of them do. And I think it’s part of the remarkable success of the United States that we have this attitude and that kids grew up with this point of view.
PAUL SOLMAN: So it’s this kind of blind optimism, unwarranted self confidence, that is actually driving the economic growth of America?
ALBERT WOJLINOWER: Absolutely. It’s the hardwired optimism which is stronger in America than in other places that accounts for the enormous business success.
PAUL SOLMAN: In the end then, if our native optimism isn’t chased away by some unforeseen event, confidence on the part of consumers may be enough to keep fueling the economy and, perhaps, resume feeding the bull. Today’s rebound in consumer confidence, at least, gives no cause to think otherwise.