The Daily Interview: The Case for an Economic Turnaround

While Wall Street debates the severity of the economic downturn and the stock market continues to get hit with corporate earnings shortfalls, consumers continue to have faith in the economy's eventual recovery. That, at least, is what the latest consumer confidence index numbers are saying, according to Conference Board economist Ken Goldstein, who argues that the strength of the labor and housing markets is what has prompted consumers to continue spending and what has kept the economy in positive gross domestic product-growth territory.

Ken Goldstein
The Conference Board
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Pointing to June's consumer confidence index number of 117.9, as well as The Conference Board's indices of leading, coincident and lagging economic indicators, Goldstein says there are a number of time-proven figures that indicate the economy is at or close to a bottom. So while bad news continues to abound, including the drop in payrolls announced Friday, Goldstein says there are a number of key figures that suggest things should start to turn around soon.

TSC: The consumer confidence index rose 1.6% in June to 117.9, up from 116.1 in May. Isn't it surprising that consumers' confidence continues to remain strong given that the economy and the stock market remain weak?

Goldstein: Absolutely not. It's not the stock market. You look at the stock market and consumer confidence over the last six months, and you'll see that there's no relationship. Consumers are not driven by what happens in the stock market but by what happens to the labor market and the housing market, not the stock market.

TSC: But the labor market hasn't been that good. The unemployment rate rose to 4.5% in June, up from 4.4% in May.

Goldstein: That's right. But it hasn't been that bad. For all the news and stories about the economy, the unemployment rate is still 4.5%. While it's not terrific, and help-wanted classifieds show that it's not changing very much, the unemployment rate is still relatively low. On top of this, people are still getting wage increases. That's what's holding up consumer confidence. It's not interest rates and it's absolutely not the stock market.

TSC: Can you put the consumer confidence number in context? When The Conference Board began the index in 1985 based on a representative sample of 5,000 U.S. households, it was at 100. Can you explain how this figure of 117.9 compares to 1985 and other periods of time?

Goldstein: Almost any time that the index is above 100, times are good. This compares to where it was in the mid-1980s, when the economy was humming along pretty well. So what it tells us is that American consumers are saying that the economy isn't that bad right now and they're not convinced it's going to fall apart over the next six months. Just the opposite. Consumers are telling us that they think that it's going to be better six months from now. Not terrifically better, per se, but better and that things are not so bad now.

TSC: Has the consumer confidence figure fallen below 100 many times since 1985? Also, how high has it gotten?

Goldstein: Yes. If you go back to 1990 and 1991 in the midst of the Gulf War and the recession, the index was down in the 60s and 70s. It has gone as low as the mid-40s. If you go back to the back-to-back recessions in the early 1980s and all of the downsizing in the early 1990s, this index has fallen well below 100.

Until the last three years, the peak has been around 120 or so. Then in 1999 and 2000, it shot through the roof like it wasn't even there. It went up into the mid-140s.

Now, here's the recent context. It went from the mid-140s down to 110, 120 at the same time that the economy went from 5% to 6% GDP growth rates to less than 2% over the last two quarters. That's still growth, not a recession. But that loss of momentum is where you're feeling the impact.

Imagine being in a car and you're just tearing down the highway at 100 miles an hour. And then you see that telltale, little red rotating light and you decide to slam on the brakes and you slow down to 70. You feel like you're crawling, but you're still going 70 miles an hour, except you've decelerated so much over such a short period of time. That's what happened to consumer confidence. That's what happened to GDP growth. And that's what gave people the feeling that they're in a recession. Technically we aren't, but it feels like it because of that loss of momentum.

Down But Not Out
The consumer confidence index is down sharply since last year, but still well above historical levels.
(Seasonally adjusted index numbers, 1985=100)
Sources: The Conference Board; NFO Research, Inc.

TSC: So, in your mind, is this number of 117.9 actually rather high?

Goldstein: Yes. Absolutely. Except for that deceleration business. If you had just stepped off the plains of Pamplona and hadn't heard a radio or read a newspaper over the last six months, and you heard that consumer confidence in America was still in the 115, 120 range, you would think, "My God, this is about as good as it gets."

And if you then picked up the paper and read all this talk about recession and the need for interest-rate cuts and the debate over whether the Fed cuts are enough, you'd scratch your head, saying, "What the hell is going on?"

So, it's only in the context of how high this thing built up last year that it feels like something terrible happened. Something terrible did happen to those 400,000 or so people who have just signed up for their unemployment claims. I'm not saying that consumers are on Prozac ignoring all of this. In fact, when the economy began to turn down in January and February, you saw an effect in the consumer expectation index. The worry was that this was just the start and that it would get much worse. What has actually happened is that it hasn't gotten much worse and the American consumer remains convinced that it is going to start to get much better. And I would not bet against the average consumer.

TSC: Let's talk about The Conference Board's index of leading economic indicators (LEI), which you oversee. It increased 0.5% in May to 109.3 after a 0.1% increase in April and two consecutive declines of 0.2% in February and March. Is a 0.5% increase significant, and what does that tell you about where the economy is headed?

Goldstein: It's not a significant increase, but it is a significant development because it raises the chance that this index, which basically was flat from January 2000 until now, could be starting to turn around.

One month doesn't make a trend. But the fact that the index has started to show some life suggests that perhaps consumers know something, i.e., that all of this decline in production, orders and confidence, and all of this increase in layoffs and decrease in jobs, especially manufacturing, maybe means it's gotten as far as it's going to go and we've hit bottom. And even if we don't come off of the bottom at a rapid pace, we are going to start to recover from that. So, it doesn't prove that that's where we are, but it raises the chance that this is what could be starting to develop.

The important thing about the index of leading economic indicators is that it's not just one number, but 10, which means that it's not just wishful thinking. One of the components of the index is data on durable goods orders, and not just total durable goods orders but orders for IT equipment.

So, there is some evidence out there that this could be the case, that this is as bad as it's going to get; it's not going to get any worse, and it could start at least to get a little bit better. So, on its own, the economy might have bottomed out. But even if it doesn't start to improve on its own, it's getting help both on the fiscal and monetary side. Our textbooks tell us that the effects of Fed rate cuts take six months. And furthermore, in August and September, a lot of us are going to start to get $300 and $600 checks in the mail.

TSC: Just as you have with the consumer confidence index, can you put the index of leading economic indicators in context? The index stood at 100 in 1996, its base year. How does the index's current 109.3 level compare to other periods of time since its inception?

Goldstein: An LEI of 109.3 is a relatively high level, but it's almost like a politician boasting that there are more people working in America today than before, but much of that may be due to the fact that the population is larger. By the same token, a larger population pumps up the value of GDP, which is one of the things that we measure when we take a look at these indicators.

So, the level of 109 is not that significant. Far more significant are the coincident and lagging indicators. If we're at the bottom, the leaders should already be up. And they are. The coincidents should be flat. And they are. The laggards should still be on the way down. And they are.

TSC: In sum, what is your general outlook for the economy?

Goldstein: I think we probably have hit bottom in terms of manufacturing and durable goods orders and the labor market and initial unemployment claims. I don't think we're going to come roaring off the bottom, but I think we are going to start to recover off of the bottom. The only danger is that we are going to see a little bit more inflation, and there's a chance that before the year is out, we are going to see interest-rate increases because the economy has improved.

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