October surprise: Americans feeling better about economy

Oct. 29, 2012 at 7:14 AM ET

Jonathan Ernst / Reuters /
Two-year-old Charles Kearley helps his parents shop for pumpkins at Stribling Orchard in Markham, Va. Consumers have been feeling better about the economy in recent weeks.

With only days to go before the presidential election, a remarkable thing has happened: Americans have stopped feeling quite so crummy about the economy in general, and their personal financial situation in particular.

It’s too early to say that people have completely let go of the financial worries brought on by the Great Recession and weak recovery. Still, several data points released this month show that Americans are feeling less negative about their finances and the economy, and a little more willing to spend money.

“People feel we’re out of the woods, but we’re not in the clearing,” said Lydia Saad, a senior editor with Gallup.

The slightly more optimistic feelings come more than three years after the economy officially came out of recession and limped into the current sluggish expansion.

“This is the typical pattern we see at the first stage of the recovery,” said Richard Curtin, chief economist for the Surveys of Consumers, a monthly look at consumer sentiment. “Now, unfortunately, we’re long into this recovery but consumers hadn’t noticed it.”

Curtin said the improving attitudes are being driven by two issues that hit closest to home: Housing and employment.

“It’s the sense that their income is improving and their household wealth is improving, and this better balance sheet has really been one of the major forces,” he said.

A recent Gallup poll showed that for the first time in five years, more Americans are feeling better off financially than they did a year ago, as opposed to worse off.

The shift was largely due to a decline in those feeling worse off, from around 49 percent of people at the beginning of the year to about 34 percent when the latest poll was taken in late October.

The number of people feeling better off rose to 38 percent, from 29 percent in January.

The modest upswing would seem to be a boon for President Barack Obama, since his handling of the economy has been a top election issue. But Saad cautioned that much of the gain is coming from Democrats.

Among Republicans, there was a decline since January in those feeling better off. That may reflect the feelings of those who support challenger Mitt Romney and see a better future under his leadership.

The partisan divide didn’t surprise her.

 “Even for something that looks like a very sound economic measure, people understand what the implications are politically,” Saad said. “People, I think, are just more political than we realize.”

The latest consumer sentiment data released Friday by the University of Michigan and Thomson Reuters confirmed that Americans are feeling better than they have felt in five years about their financial prospects. Still, the data showed that many remain worried that either the economy in general or their personal situation will get worse.

Curtin, chief economist for the consumer survey, said more Americans are feeling better about their own situation and also report hearing better news generally about those close-to-home issues. That’s in keeping with a separate poll the Pew Research Center released this month, showing that Americans felt they were hearing less negative news about the economy.

The unemployment rate has been edging down very slowly for a while and dropped below 8 percent last month for the first time since 2009. But many economists said recent signs the housing sector is stabilizing may have been a bigger driver of improved consumer feelings in recent months.

“I really believe it’s tied most intrinsically to housing,” said Diane Swonk, chief economist with Mesirow Financial.

For many Americans, their home is their biggest financial asset, she noted. The housing market crash left many people feeling financially fragile and nervous about the future, if they were able to hang onto their house at all.

Now, she said, people may be more likely to see that a neighbor’s house is for sale and selling for a good price. They may also have been able to take advantage of record-low rates to refinance, leaving them with a bit more money at the end of the month.

 “They’re willing to spend a little bit more,” she said.

The painfully slow but relatively steady improvement in the unemployment rate also is fueling some of the more optimistic feelings, said David Sloan, a senior economist with 4Cast in New York.

“I think the people who have jobs are feeling secure, and the numbers of unemployed are gradually declining,” he said.

Sloan said the economy does seem to be showing signs of genuine improvement. Still, he cautioned that other economic factors, which most Americans are less likely to be thinking about, could derail some of those gains.

Businesses have grown increasingly worried that politicians won’t come to an agreement over the so-called fiscal cliff, a series of automated tax increases and spending cuts that are scheduled to take effect if Congress doesn’t act.

Executives also may not like the uncertainty of not knowing who will win next week's elections, since the outcome could mean more political gridlock over important policy issues.

The European economic situation also remains somewhat uncertain, and that could have a ripple effect on U.S. businesses.

 “The question is, is it sustainable?” Swonk said of the slow economic improvements. “We’re in a pretty fragile situation and it’s only sustainable if those other shocks that people don’t think about don’t … sneak up on us.”


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