Ask Americans how the economy is doing, and their answer is stark: It is not just bad, it is run-for-the-hills terrible. Consumer confidence is at its lowest level in almost 30 years. Only 12 percent of Americans think the economy is in good shape. On the Internet, comparisons to the Great Depression are widespread.
But the reality is different. According to most broad measures of how the economy is doing, it's not all that grim.
So far, the economy is holding up better than it did during the past two recessions in 1990 and 2001. Employers haven't cut as many jobs, the unemployment rate is still relatively low, and gross domestic product has kept rising.
Things are nowhere near as bad as they were in the Great Depression, or even during the severe recession of 1982-83. The last time consumers were this miserable, in May 1980, the unemployment rate was 7.5 percent and inflation was 14.4 percent. Now those numbers are 5.5 percent and 4.2 percent respectively.
This paradox has created a unique challenge for those guiding the economy, who worry that Americans' pessimistic views will become a self-fulfilling prophecy. Two-thirds of the economy is consumer spending. So if people's negative outlook leads them to cut their spending, a steeper downturn could happen.
This has left economists trying to figure out why Americans' perceptions are so much more negative than the data analysts use to measure how things are going.
"We're saying that we feel a lot worse than we did at the depths of the last recession, when we had had 2 or 3 million job losses, that we feel worse than we did after 9/11," said William Cheney, the chief economist at John Hancock Financial Services. "At some level, that just doesn't make a whole lot of sense."
But through the prism of daily experience, it may. Rising gasoline and food prices, for example, appear to affect people's perception of how they're doing more than a similar price rise in other goods.
Eric Johnson, who studies behavioral economics at Columbia Business School, offers this example: Someone who has to pay an extra $25 to fill up his car is reminded of that cost once a week -- or more often if you count the times he is driving down the road and sees the $4 per gallon price in giant numbers on a sign. Technically, he is no worse off than if his rent had increased by $100 a month. But it feels a lot worse.
"Things that you buy more frequently and that have large percentage increases will weigh more in people's perception of inflation," Johnson said.
Americans have been unnerved by the financial crisis that was a major cause of this broader economic slowdown. The credit crisis has spilled from one part of the financial markets to another. Also, homes are losing value, which reduces the wealth of more people than a plummeting stock market.
Wellesley College economist Karl Case and two co-authors researched how changes in the value of homes affect what people spend and got a curious result: When home prices are rising, people spend more money. When they are dropping, they don't spend less money.
"People spend more when house prices go up and worry more when prices go down, but don't actually spend much less," Case said. "That could explain why consumer spending numbers have been much more robust than you would expect if you look at consumer sentiment."
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