The Deepest Anxiety

In a previous post I noted the power of long term expectations as an influence on consumer sentiment and behaviour. Robert Shiller argues that people's deep anxieties and fears can influence their spending (and borrowing and saving) decisions over the long term.

Unfortunately we don't have an equivalent in Ireland to the Thomson-Reuters University of Michigan Consumer Sentiment Index question on long term expectations for the economy that Shiller uses.  Just to remind you, the question is:

“Looking ahead, which would you say is more likely – that in the country as a whole we’ll have continuous good times during the next five years or so, or that we will have  periods of widespread unemployment or depression, or what?”

However, a report published yesterday by the European Parliament on Europeans and the Crisis sheds some light on long term expectations. They surveyed nearly 27,000 Europeans last month. The question is:

"When it comes to a return to growth in (respondent's country), which one of the following opinions is closest to your own?"

I've copied the relevant chart from the report for Ireland.  Nearly half (49%) of all adults in Ireland think that when it comes to a return to growth in Ireland the crisis is going to last for many years. A significantly higher proportion than in the whole of Europe. It isn't obviously the same question as used by Shiller, but it does shed some similar light on long term expectations.

Consumer sentiment is now in 'lock down' mode in Ireland as the domestic economy (especially consumer spending) enters its fifth year of contraction. This is crucially important ahead of Budget 2012. Of course, the psychological impact of previous governments' budgets has been a consideration before. Though certainly not the main consideration. However I suspect as Budget 2012 looms large in the public imagination then it may well turn out to be one of the most psychologically important budgets in recent years.

That Seventies Feeling

Consumer confidence is an intriguing topic for economists. Firstly, confidence is psychological. And economists have recognised the importance of psychology at the micro and macro levels since George Gallup started measuring and reporting US consumer confidence back in 1938.

Secondly, confidence is emotional. As a concept it captures an array of feelings relating to optimism, pessimism, fear and hope. That a lot of feelings. And certainly a far remove from the straw man of utility maximizing home oeconomicus parodied by many of economics' critics.

Thirdly, confidence is predictive. Especially in relation to consumer behaviour - including spending, saving and borrowing. Crucially, measures of confidence can sometimes determine the near term outlook for economic recovery in recessionary times as it gauges the views of the general public about future prospects. Or lack thereof.

Though consumer sentiment indices can be used to anticipate developments 3-6 months ahead, they can also inform the longer term outlook as well. For example, Robert Shiller focuses on just one of the component questions used to create the Thomson-Reuters University of Michigan Consumer Sentiment Index. It is Question 4, namely:

“Looking ahead, which would you say is more likely – that in the country as a whole we’ll have continuous good times during the next five years or so, or that we will have  periods of widespread unemployment or depression, or what?”

Shiller's rationale, as set out recently, is as follows:

That question is usually not singled out for attention, but it appears spot-on for what we really want to know: what deep anxieties and fears do people have that might inhibit their willingness to spend for a long time. The answers to that question might well help us forecast the future outlook much more accurately.

So where does the index for Q4 stand in September 2011? That's the worrying thing. It certainly has Robert Shiller worried. I've updated a chart for the Q4 Index to end 2009 with the current September 2011 index = 48. It's back to levels last seen in the 1970s and early 1980s.

In America - as in Ireland - consumer sentiment is now bound up in a narrative about debt and risk that will reverberate far beyond just the next few months.  As Shiller sees it, the current, 'depression narrative' will need to be replaced with a more inspiring story. Who will do the replacing is not so clear.

Perhaps economists will have to become better storytellers?