Monday, October 22, 2007

Recessions happen to other folks 

A recent CNN poll found 46% of Americans believe the economy is in a recession, while 51% do not. What does that mean? Many conservative writers will look at the current economic situation and say things are going well and it's all MSM pushing a recession meme to influence politics. If you ask business economists they say the outlook has dimmed. (Last consumer confidence was down, it will be interesting to see this time next week.)

Jeffrey Miller wrote last April about a similar observation. The public often holds a more negative view of how well others are doing than themselves. Political scientests refer to voting based on these perceptions as 'sociotropic' -- people vote on how they perceive the group is doing rather than on the basis of their own pocketbooks. There's reason to believe, even if you've not read or read and don't buy Bryan Caplan's work, that voting might be based on some more vague perceptions rather than what is actually best for your own finances.

So today's Gallup Poll on investor confidence is particularly interesting in this light.

Investor optimism overall remained at its lowest levels of the year in October, according to the new UBS/Gallup poll. The Index of Investor Optimism now stands at 70 -- essentially the same as September�s 68. ...

Although the overall Index remained flat, its composition changed significantly. The Economic Dimension of the Index, which measures investors� feelings about the direction of the overall U.S. economy, improved 10 points, from -2 in September to +8 in October. This suggests that the Fed�s cut in interest rates and early October�s more positive monthly unemployment report made investors somewhat more optimistic about the future direction of the U.S. economy.

In sharp contrast, investors� optimism about their individual investment portfolios fell in October, as the Personal Dimension of the Index tumbled 8 points to 62 from 70 in September. This matches the 2007 low point for investors� optimism about their own portfolios, recorded in April. It also suggests that many investors may not be as confident as they were a month ago that the equity markets can continue to do well even as the overall U.S. economy slows.

Among investors, then, the feelings about the economy are much more pocketbook than sociotropic.

A local friend reported to me that someone spoke in a meeting of business leaders rather negatively about my writing on the local economy. Basically that I don't know what I'm talking about. Someone responded to him that at least sectorally there are problems stemming from housing. My friend reported that, afterwards, several people came up to him and the guy who spoke back to the critic saying "doesn't he know there are people really hurting out there?"

"Is your firm hurting?" I asked.

"No, we're fine," he replied. "But I know others who are in big trouble."

The question is, how do we know that, and how does it influence both what we say about the economy and how we vote for candidates we think can do something about it? (Whether they actually can do anything is another matter.)

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