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Consumer pessimism persists, despite signs of economy getting stronger

A rift is emerging between Americans' state of mind and the state of the economy.

The economy is getting stronger, with the nation's gross domestic product growing at its fastest clip so far this year. The number of new people signing up for unemployment benefits has steadily declined, and consumer spending is rising.

But by almost any measure, Americans remain unhappy. Consumer confidence has plunged to levels last seen during the financial crisis. A recent Nielsen poll found that nine out of 10 Americans believe the country is still in a recession.

"It's the hangover from the Great Recession," said James Russo, vice president of global consumer insights for Nielsen. "People feel the economy not at the macro level but at the micro level."

This persistent pessimism has confounded economists. The link between how we feel and what we do is a cornerstone of economic philosophy, what John Maynard Keynes dubbed the "animal spirit" that moves the marketplace. Most of the time, our emotions and our actions move in tandem.

But the gap between the two has widened since the financial crisis. Economists say something will have to give — Americans will perk up or, more worrisome, the recovery will conform to their low expectations.

Lynn Franco, research director at the Conference Board, said consumers have been beaten down too long to be impressed by recent blips of good economic news. The group conducts monthly surveys of consumer confidence that, along with a similar poll performed by the University of Michigan, serve as the official road maps to the consumer psyche. Both indexes plunged to near-historic lows during the third quarter.

According to conventional theories, depressed consumers spend less money, slowing down economic growth and further eroding confidence in a vicious cycle of decline. But this time, consumers have proved willing to pull out their wallets. Consumer spending in the third quarter rose 2.4 percent, the biggest jump this year. After several years of people paying down debt, consumer credit has inched back up to 2009 levels. Meanwhile, the savings rate has dropped to 3.6 percent, the lowest level in four years.

"They're not happy spenders," said Chris Christopher Jr., chief economist at the consulting firm IHS Global Insight. "The fear is still there."

The scales can also quickly tip. Typically, attitudes are merely reflections of major sectors of the economy, such as the job market or stock prices. But during changes in business cycles — from recession to recovery, for example — consumer confidence can provide a crucial nudge, said Mark Zandi, chief economist at Moody's Analytics.

"One false move, one shock that we're not anticipating, that will send people into panic mode," he said.

Consumer pessimism persists, despite signs of economy getting stronger 11/11/11 [Last modified: Friday, November 11, 2011 10:03pm]
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