The Bipolar Economy: If Consumers Are Happy, Why Is Business So Miserable?

For years after the crash, businesses were growing while consumers were struggling. Suddenly, businesses are pessimistic, and consumers are happy. Who's right?

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Reuters

A strange inversion has happened in the past few months: Consumers have gone from being deeply pessimistic about the future to slightly optimistic at the same time that companies have moved from being slightly positive to increasingly negative. That discrepancy is intriguing, and raises the question: Which view will determine the course of the near future? Will the buoyed spirits of people carry the day, or will corporate glumness pull us down?

The evidence that consumers are perking up comes from the multiple consumer sentiment surveys done each month, especially those conducted by the University of Michigan and the Conference Board. The most recent Conference Board survey released earlier this week showed consumer confidence at its highest level since February 2008, while the University of Michigan index of consumer sentiment had surged nearly 30 percent from a year earlier as of late November. The Michigan survey revealed more optimism about the employment situation than at any point since 1984.

Some of the improvement in sentiment indicated by these surveys is clearly tied to a better housing market, with prices increasing across the country. Some of it can probably be explained by just how pessimistic people have been over the past few years. These reports cannot compare how people felt in 1984 with how they feel now. The scores are based on purely subjective questions about how people feel ("Do you think that a year from now you will be better off financially, worse off, or just about the same?"). The change in scores is reflected month by month, but the surveys say nothing about the quality of those feelings over time.

So while the surveys show the most positive results in years, it's possible that they are only positive relative to how negative people were in 2009, 2010 and 2011, and that compared to the 1980s and 1990s, people aren't actually feeling so confident. The same goes for income: More people than at any point since early 2008 say their finances are improving; that raises the index. But given that most incomes have been stagnant for the past decade or more, improvement does not necessarily translate into objectively good.

Still, the shift is noticeable, and even more so when juxtaposed with what business leaders say and the steps they are taking. Executives seem fixated on the logjam in Washington and the uncertainty surrounding the "fiscal cliff" and tax rates next year. A Wall Street Journal study of 40 major companies found that more than half planned drastic cuts to their investment and spending through the end of this year and into next year in response to the potential for higher tax rates. Business leaders have been aggressively lobbying in Washington these past weeks to make clear to the White House and Congress that if there is no resolution of the "fiscal cliff" the consequences for business will be dire. That is leavened somewhat by other reports, such as yesterday's durable goods orders, that indicate more modest contraction. Still, the prevailing sentiment is, as Dupont's chief executive officer, Ellen Kullman, said, "We're pulling back ... and taking a wait-and-see attitude." Others have been stark. Said Brian Moynihan of Bank of America: "Uncertainty continues to hold back the recovery. Simply put, our clients tell us they will not be aggressive in times of uncertainty."

The current business pessimism and consumer optimism is in sharp contrast to the consumer pessimism and business optimism of the past few years. As the overall U.S. economy has struggled and the situation in Europe has been perilous, businesses - especially larger global corporations - have been doing just fine. From 2009 to 2012, the companies of the Standard & Poor's 500-stock index generated double-digit profits and even healthier revenue gains based on booming business in China, Brazil and other emerging economies.

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Zachary Karabell is Head of Global Strategy at Envestnet, a financial services firm, and author of The Leading Indicators: A Short History of the Numbers that Rule Our World. More

At River Twice Research, Karabell analyzes economic and political trends. He is also a senior advisor for Business for Social Responsibility. Previously, he was executive vice president, head of marketing and chief economist at Fred Alger Management, a New York-based investment firm, and president of Fred Alger and Company, as well as portfolio manager of the China-U.S. Growth Fund, which won a five-star designation from Morningstar. He was also executive vice president of Alger's Spectra Funds, which launched the $30 million Spectra Green Fund based on the idea that profit and sustainability are linked. Educated at Columbia, Oxford, and Harvard, where he received his Ph.D., he is the author of several books, including Superfusion: How China and America Became One Economy and Why the World's Prosperity Depends on It (2009), The Last Campaign: How Harry Truman Won the 1948 Election, which won the Chicago Tribune Heartland Award, and Peace Be Upon You: The Story of Muslim, Christian, and Jewish Coexistence (2007), which examined the forgotten legacy of peace among the three faiths. In 2003, the World Economic Forum designated Karabell a "Global Leader for Tomorrow." He sits on the board of the World Policy Institute and the New America Foundation and is a member of the Council on Foreign Relations. He is a regular commentator on national news programs, such as CNBC and CNN, and has written for The Wall Street Journal, Newsweek, Time, The Washington Post, The New Republic, The Los Angeles Times, The New York Times, and Foreign Affairs.

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