Gloomy outlook threatens economy

There is something in us that is drawn to bad news about this economy.

Maybe it is simply deriving satisfaction from saying, “See? It’s as bad as I’ve been saying it was.”

Whatever the reasons, we often seem bent on convincing ourselves that the economy is tanking, all is lost and we’re doomed. And a good bit of the information we have been getting recently confirms our gloomy outlook.

Not all gloom is created equal, though, and an incident on a recent British Airways flight from London to Hong Kong reminds us of that.

On that particular flight, as the jetliner sped through the evening darkness over the North Sea, the 275 passengers aboard were suddenly startled by the overhead speakers announcing the news that they had to prepare for an emergency water landing because the plane was going down.

Based on that information, it is understandable that many of the passengers adopted a gloomy outlook.

As it turned out, the emergency landing announcement was bogus. Either the cockpit crew had pushed the wrong button or a computer had malfunctioned. The cabin attendants reassured the passengers, the rest of the flight was uneventful, and the aircraft landed safely in Hong Kong.

The economic data and news reports that have prompted our gloomy outlook are forms of information, just like the announcement on the plane, but there is a fundamental difference between airplane gloom and street level economic gloom.

What is really different in the two situations is that in the jetliner the passengers’ gloomy outlook would not affect the outcome. In an aircraft, it doesn’t even matter whether the passengers believe the announcement. No matter how they take the news, as long as they stay in their seats their mood would not affect the plane’s trajectory.

On the ground, though, our gloomy outlook can very definitely affect the way the story ends.

Economists didn’t invent the term, but they call the relationship between beliefs and events a self-fulfilling prophecy and it is a characteristic of free market economies. In our economic situation right now, if enough people believe that the economy is tanking and they reduce consumption and investment, for example, the economy actually will tank. We could call it econotelekinesis, a term only an economist could love.

There is an element of that in our economy already. Individuals and households are continuing to reduce their debt levels rather than increase spending, which suggests that they are concerned about the future. This concern is also reflected in the depressed levels of consumer confidence reported over the past few months.

The actions of individuals and households to cut their debt and increase savings is a good thing and certainly has been devoutly wished by economists for decades, especially as credit card debt was increasingly used to finance unsustainable lifestyles. Still, doing it all at once slows down the economic recovery and, that, unfortunately, reinforces the idea that hunkering down is the smart thing to do.

Sluggish consumer spending lays a double whammy on the economy, first by slowing growth in total output, and second by further eroding the confidence of the business sector. After an economic setback of this magnitude, businesses generally tend to recover their optimism before households do. But the longer consumers spend in the doldrums the more difficult it becomes for businesses to sustain their confidence and back it up with increased investment and hiring.

The gloomy mood of consumers is not entirely unjustified, but it is not entirely accurate, either. The economy is not falling apart at all, but the recovery is slow going and in some ways feeling the effects of our being so worried about it.

The upswing in consumer confidence in August defied all the gloomy reports and is not only welcome but also a reminder that our mood is only partly driven by news reports. The level of confidence is still anemic and far below what we would consider robust, but improvement in the face of adversity is really encouraging. Our economy in the second half of this year may be a lot stronger than the gloomy predictions suggest.

When, in 1933, President Franklin D. Roosevelt addressed the nation full in the grip of a financial and economic collapse and said that, “The only thing we have to fear is fear itself,” he expressed in elegant simplicity the powerful role of emotion in times of economic distress. If he were making that speech today, he would be warning us not to let a gloomy outlook take over our lives and make a mess of things.

James McCusker is a Bothell economist, educator and consultant. He also writes a monthly column for the Snohomish County Business Journal.