How Boomers Save the Eeconomy

Consumer Confidence

Throw away the market index. Forget interest rates. And don't bet on the GNP. If you want the most accurate forecast of the American economy you have to turn to an instrument so sensitive it's at the cutting edge of research--the mind of the ordinary consumer.

What transforms the economically untutored consumer into the most sophisticated of economic indicators is the Index of Consumer Expectations, the individual and aggregate answers to a questionnaire that probes the motives, aspirations, intentions, and values of guys and gals next door each month. Constantly tuned to pick up the slightest changes in attitudes and behavior, the survey is the only U.S. Department of Commerce leading indicator to assess the human factor in economic affairs.

That factor has been growing steadily since World War II, with large numbers of people gaining discretionary income, and common items like cars and washing machines taking on all the characteristics of investment goods. The luxury to make purchases according to a personal timetable opened up the economy to the influence of the psychology of the consumer, says Richard Curtin, Ph.D., who keeps tabs on it at the University of Michigan's Institute for Social Research.

The latest report pegs the economy on a continuing, if slow, road to recovery from a mild recession, with consumers less optimistic than they were in the mid-'80s but far more willing to spring for big-ticket items than they were last January. "The recession is in an ending stage," says Curtin, who doesn't expect consumers to be forecasters of the economy. "The index taps their sense of underlying confidence in their own personal financial situation, which is influenced by the economy as a whole, for the short term and for the next three to five years."

What do consumers know and how do they know it? They're the first to sense when factory orders are down or when a neighbor loses her job. They know when interest rates go up, because the mortgage goes up, as do other installment loans. And when inflation escalates, their purchasing power erodes. All conspire to create uncertainty about their own financial situation, and unwillingness to incur new debt.

"After the invasion of Kuwait," says Curtin, "rising uncertainty led people considering big-ticket items to keep their commitments short." That much was expected. A Mideast war threatened gasoline prices, and past experience had taught how a rise in oil prices could destroy the economy.

But for the first time in economic history, consumers confined the perception of gloom to the short term. They told Curtin's surveyors that they didn't plan major changes because they expected the economy to revert back to normal in the long run. In the past, every dramatic event shifted the entire constellation of attitudes. What's new, concludes Curtin, is that consumers now have a greater sense of stability, and that in turn stabilizes the economy.

"Consumers today are less likely than ever to interpret new developments in a way that leads to drastic changes," Curtin says. "That's because the baby boomers have experience with a wide range of economic times; they've seen these boom and bust cycles throughout much of their adult life. And their greater sense of stability in the economy psychologically dampens the impact of these changes."

It's possible that consumers will revert back to older patterns. But Curtin doesn't see evidence of that happening any time soon.