Back in the days of the “Batman” television series, the Riddler wore a uniform jersey with a big question mark on it. It is not likely that the Federal Reserve is passing out similar jerseys, but it might not be a bad idea.
Tuesday’s Fed decision to hold off on further interest rate increases – the first respite from upward movement in two years – was an accurate reflection of economists’ consensus view of the direction of the U.S. economy: uncertain.
This is the time of the sotto voce forecast, whispered rather than shouted in the hope that it will be forgotten. Economists and Wall Street analysts haven’t given up on forecasts. That’s how they make their living after all. But even the authors do not seem very confident in them.
The uncertainty is understandable. There are a lot of things happening and some of them, particularly in the Middle East, have the potential to really mess things up.
So far, the economy remains resilient and is adjusting to both gradual changes and sudden shocks. It seemed that almost everybody knew the housing market slowdown was coming. In the words of Cole Porter, it “was too hot not to cool down.” So they had already taken it into account and were dealing with it. Even more remarkably, the economy has also seemed to take on the higher energy costs without breaking stride.
Of course, the latest news of the Prudhoe Bay, Alaska, pipeline being shut down has yet to be fully absorbed, but the release of oil from the Strategic Petroleum Reserve should help to calm the markets until the global economies can readjust to the new supply situation. The Prudhoe field accounts for 8 percent of total U.S. production, so we should be able to handle that reduction without a diva-grade emotional price blowout.
Still, even the optimistic economists are predicting a slowdown in economic growth, and those who inhabit the darker chambers are seeing far worse than that.
Economists and others who construct economic forecasts always look closely at how consumers are seeing things. In addition to the retail sales data, which reflects recent consumer behavior, there are two sets of statistics that reflect consumer attitudes and provide a hint about their future actions. One is the University of Michigan’s Index of Consumer Sentiment, and the other is the Conference Board Consumer Confidence Index.
These two economic indicators are frequently mistaken for one another, even by the news services that report them and the market analysts who use them. But while they both measure much the same thing, consumer attitude, they are not really the same.
One reminder that they aren’t the same is that they don’t always move in the same direction. The most recent data, for example, shows that in July the Consumer Confidence Index went up while the Index of Consumer Sentiment went down.
The difference may be a matter of sampling size and technique. The Michigan data comes from a telephone survey of about 500 people while the Conference Board uses a sample of approximately 3,500 responses to a mailed questionnaire. But whatever the cause, those of us using the indicators are still left to figure out how to interpret data that measures the same thing but moves in two different directions. No wonder the Fed decided to wait this one out.
While the Federal Reserve is waiting, it might take a look into a longer-term issue raised by the University of Michigan survey data: the huge gap between the expectations of lower-income and higher-income people. It’s the largest difference in nearly a quarter century.
This gap in expectations will probably not have an immediate effect on total consumer spending. The lowest income households tend to be high-spending, low-saving consumers. What these households get for their money, however, will be directly affected by price increases in such things as gasoline, food, rent and other staples as well as credit card and loan interest. That could certainly explain why they are so much more pessimistic about the future than the higher income groups. A gap of such proportion is not an immediate issue for financial markets, but it will eventually have a negative effect on the overall economy.
The Federal Reserve was probably right to defer a decision on interest rates. Waiting is often the smart thing to do when getting conflicting signals from the data as we are now.
Waiting is not the same as sleeping, though. And given the level of uncertainty in financial markets, this would be a good time to adopt a Johnny Cash strategy and keep our “eyes wide open all the time.” It’s our economy, after all.
James McCusker is a Bothell economist, educator and consultant. He also writes “Business 101” monthly for the Snohomish County Business Journal.
Talk to us
> Give us your news tips.
> Send us a letter to the editor.
> More Herald contact information.
