This content is provided by Americans for Tax Reform Foundation.
One of the maxims of modern-day economics is that the entire system is built on confidence. Feelings of financial insecurity have a tendency to spread quickly and envelop the entire economy. For this reason, it is extremely important that consumers have confidence in the fundamentals of the economy.
It is natural for citizens to feel trepidation about the economy during and immediately after a recession. The University of Michigan/Thompson Reuters Consumer Sentiment Index reflects this phenomenon. Indeed, the index registered at the low level of 70.4 in the third month of the Reagan recovery, January 1983.
However, in a solid recovery a spike in consumer sentiment generally occurs as citizens sense that the engines of economic growth are restarting. In the mid-1980s recovery, consumer confidence shot up remarkably quickly. In just four months, the index had increased from 70.4 in January 1983 to 93.3 in May of that year. As consumers felt a sustained boost to the economy, the index remained around or above 90 for the rest of the recovery.
In the recovery overseen by President Obama, consumer confidence has failed not only to sustain the levels reached under Reagan but even to reach them at all. The highest data point in the University of Michigan index during the tenure of President Obama is 79.3, recorded in May. Just as it appeared that consumer sentiment might be approaching normal levels, the index dropped sharply to 74.1 in June.
At every point in the Obama recovery, consumer confidence has been below its level at equivalent points in the Reagan recovery. The perception on the part of ordinary Americans that the economy is in a precarious position has negatively impacted growth. When consumer spending suffers, roughly 70 percent of economic activity declines.
Data on consumer spending show that low confidence in the economy has indeed affected outlays. Real personal consumption expenditures (PCE), consumer spending adjusted for inflation, have risen by only 5.52 percent over the first 13 quarters of the Obama presidency compared with 8.87 percent in the first 13 quarters of President George W. Bush’s first term. PCE was not calculated on a quarterly basis during the Reagan presidency, but Commerce Department figures show a strong 12.87 percent increase over the first three years of Reagan’s first term.
Midway through President Obama’s fourth year in office, consumers are still not spending because they remain worried about the fundamentals of the American economy, and rightly so. In the absence of the enactment of pro-growth policies, expect consumer confidence and spending to linger at subpar levels.