Despite a Year of Upheavals, Economic Optimism Is High
By DAVID LEONHARDT
The New York Times
May 21, 2002
With a stock market bust, a recession that wiped out almost two million jobs and the terrorist attacks of Sept. 11, Americans would seem to have plenty of reasons to worry about a diminished future. Instead, they have emerged from the nation's recent turmoil far more optimistic than after any other economic downturn in a generation.
In place of the economic malaise that generally plagued the public in the 1970's and from the late 1980's through the early 1990's, polls show that by wide margins Americans now say that the coming years will be prosperous and that today's children will live better than their parents.
In a survey by the University of Michigan, for example, half of those polled said that they believe that the next five years will bring continuous good times, more than did at any point from 1970 to 1996 and up from a low of 8 percent in 1975.
Monthly measures of consumer confidence, much higher than they were at the end of other downturns in recent decades, suggest that people now see a recession as merely a hiccup. On Friday, Michigan's widely followed index of consumer sentiment moved up in a sign that many people believe that the country's recent economic troubles are fading.
"I think back to how it felt in the early 90's, and it was much different," said Arla Lerman, 43, a real estate broker who lives in Evanston, Ill. "We were really worried about what was going to happen and how we were going to come out of it."
Today's underlying optimism helps explain a central economic mystery of the last year: the continued willingness of consumers, despite uncertain times, the fall in the stock market and a sharp contraction in business investment, to take on more debt and buy new houses and other costly items. Their spending allowed last year's economic downturn to be among the shortest and perhaps the mildest on record, defying many post-Sept. 11 predictions that it would turn into the worst in decades.
Indeed, the recent recession is now almost certain to be the only one since 1949 in which consumer spending did not decline in any quarter. Last week, the government said that retail sales rose a solid 1.2 percent from March to April. But the recovery could be shaping up to be a meager one, according to leading economic indicators released yesterday by the Conference Board, a research firm in New York.
The confidence in America's economic future rests on two decades in which inflation and interest rates generally fell, one foreign economic rival after another faltered and long-term investments in stocks and homes were usually rewarded.
Even though the Dow Jones industrial average has dropped nearly 10 percent in the last year, it is twice as high as it was in late 1995. House prices are still rising in most cities. Unemployment has spiked since late 2000 but is significantly lower than it was at the end of past recessions.
"The image of America has been of a powerful, booming country without peer, an image that we haven't seen since the 1950's," said Alan Brinkley, a professor of American history at Columbia University. "We're seeing the cumulative impact of a social experience that extends back over a generation."
This rosy spirit may not necessarily last. The national mood tends to shift slowly, as it did when the problems of the 1970's chipped away relentlessly at the confidence of previous years. Many people are holding onto memories of the booming 90's, public opinion experts said; a stagnating stock market, a slump in earnings, or another terrorist attack could bring a new wave of doubt.
Already, people give a rosier appraisal of the country's condition than they do of their own, said Andrew Kohut, director of the Pew Research Center.
Much of the new optimism probably stems from the higher pay that people in all income groups have been getting since 1996.
When joblessness fell in the late 1990's to the lowest level since the early 1970's, even the poorest fifth of American families received, on average, a 14 percent raise over the rate of inflation from 1996 to 2000, according to the Economic Policy Institute in Washington. From 1973 to 1996, real incomes for those in the same group fell 2 percent.
Middle-class families, who made only meager gains in the 1970's and 80's, also achieved solid progress in the late 90's. Affluent families continued to make the biggest strides.
The nation's families do not consider their own financial situation to be better than they did 20 years, according to polls, perhaps because many now work longer hours. But the recent income gains seem to have made them more sanguine about the years ahead.
"Maybe I'm overly optimistic," said Shirley Kagiwama-Manley, a 42-year-old computer programmer who lives in Littleton, Colo., with her husband and two children. "I just think everything is cyclical."
Over all, she was still confident enough to spend a recent afternoon on what she called a "girls' splurge," getting pedicures with friends at a Denver spa and then going to dinner.
"This isn't something I do all the time," she said, while waiting for her red toenail polish to dry.
The political implications of the new optimism are less clear than the economic effects, public opinion experts said. Incumbents have won a large share of their races over the last eight years, but many analysts think that reflects other factors as much as it does the improved sense of national well-being.
It is clear, however, that Americans have recently become more satisfied with and more optimistic about the economy.
In a monthly survey, the Conference Board asks people to evaluate the economy as positive, negative or neutral and to predict its condition in six months. In April, the index that the company calculates from the responses was at 109, up from a recent low of 85. In the 1990-91 recession, by contrast, it hit a low of 55, fell back to 47 in 1992, and did not recover to last month's level of 109 until 1996. The index fell to similar lows in the early 80's and mid-70's.
In the 60's, a decade of mostly good times, confidence measures behaved much as they have the last decade.
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Similarly, in early September — even before the terror attacks caused a surge of a patriotism and the answers to become more positive — 43 percent of people told the Gallup Poll that they were satisfied "with the way things were going in the United States."
In 1990, the number fell as low as 29 percent and then dipped further, in 1992, to 14 percent. In the late 70's and early 80's, it fluctuated from 12 percent to 35 percent.
To most Americans, the future seems brighter, too. In a New York Times/CBS News Poll late last year, more than 70 percent said that today's youth were likely to have a better life than their parents. In 1983, only 54 percent of respondents gave that answer, according to the Roper Organization, and the number remained near that in the mid-90's.
By now, however, almost everybody younger than 40 has experienced only one or two recessions as adults, and both were mild. During that span, layoffs have become common even in good times, but the economy has created enough new jobs to keep unemployment low.
"It feels like people I know who have been laid off have been able to find other jobs," said Ann Perry, a 38-year-old agent for artists and photographers in Pleasant Ridge, Mich., a suburb of Detroit. Ms. Perry said her business was "painfully slow" the last year but that the economy still seemed much healthier than it did a decade ago.
"I see people are still buying cars, still making home improvements," Ms. Perry said. "Things can't be that bad if so many people are driving these big, fancy S.U.V.'s."
Indeed, some of the best evidence of the confidence has been the powerful response to zero-interest financing offers major automakers began late last year. Almost six million people bought vehicles in the last four months of 2001, and most of them added thousands of dollars to their debt loads to do so.
"In a prior era, that promotion would have fallen flat," said Richard T. Curtin, director of the University of Michigan's monthly consumer surveys. "But if you view your long-term prospects as good, you say, `zero-interest loans? That's an opportunity I can't miss.' "
Many forecasters expected consumer spending to falter early this year, saying people would retrench after the buying binge. But spending grew, rising at a relatively fast annual rate of 3.5 percent in the first three months of the year, according to the Commerce Department.
The buying of homes, which is not included in the spending numbers, has remained strong, too. Ever-increasing home values — the most significant source of wealth for most families — have helped many people feel more secure.
"When we bought our house, it felt like a big risk," said Kathryn L. Evans, a map dealer in New Orleans.
In 1991, Ms. Evans and her husband, a firefighter, bought their century-old home in the city's Uptown section, when crime there was common and the economy was weak. The house is now worth three times what they have spent on it, she said.
Such increases in value have seared into people's minds the idea that investments will almost always pay off, as long as they wait a few years. Perhaps perversely, expectations for future returns have even increased.
About 90 percent of investors say the stock market will increase over the next 12 months, up from 64 percent in 1989, according to a survey by the Yale Schol of Management. The level has remained almost unchanged since early 2001 even as the market has dropped.
"People still remember the 90's," said Robert Shiller, an economist who oversees the survey.
James Wright is one of the optimists, despite having lost about 30 percent of the value of his 401(k) in recent years. "I'm still secure in investing in the stock market for the long run," said Mr. Wright, 57, of Deerfield, Ill. "For me, it's investing in the U.S., and so it's a good investment."
The dark lining to today's optimism may be the high expectations that many Americans now have for the future. If unemployment does not fall soon or the stock or housing market stagnates for years, the prosperity of the 90's will eventually start to feel far away.
"This has been a remarkable achievement," Mr. Curtin, the survey researcher, said about the shift from pessimism to optimism. "But let me caution you that it ain't over."
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