Many economic observers probably joined Wall Street in its disappointment on Friday as Federal Reserve Chairman Alan Greenspan delivered his first speech on the economy for 2002. Most observers expected the Fed chairman to be optimistic about the long-run future of the U.S. economy -- and he was -- but he also was cautious about the short-term outlook, and warned against assuming that an economic recovery in the months ahead is a foregone conclusion. New Gallup Poll economic data (see Consumers Expect Better Times Ahead in Related Items below) from Jan. 7-9 show that for the first time since November 2000, more Americans say that economic conditions in the country as a whole are getting better as opposed to getting worse. However, consumer perceptions of the current state of the economy suggest that business decision-makers would be well advised to heed Greenspan's warning.
As Greenspan noted, the current economic outlook does contain a number of positive signs, ranging from lower energy prices and reduced interest rates to better-than-expected retail sales and improved consumer expectations. Overall, the U.S. economy -- as well as the global economy -- has coped relatively well during the months following Sept. 11.
Not that economic prognosticators are a bunch of wide-eyed optimists -- we all hedge our forecasts for unforeseen catastrophes. For example, no one can predict the potential economic impact of another terrorist incident. Nor can anyone anticipate what might happen if Japan's continuing economic problems become more serious, or if Argentina's problems spread throughout South America.
These obvious risks to the economic outlook aside, Gallup's survey results suggest another potential qualification to recent signs that a recovery is imminent: there may be a big difference between consumer expectations and consumer behavior. While consumers' expectations for the future have improved considerably in recent months, their perception of the current state of the economy is that it is still very weak. Not surprisingly, in response to this economic reality, many consumers suggest that they will save more while spending and borrowing less during the next six months, even though they expect their incomes to increase.
As Greenspan said in his speech, we are experiencing a capital investment/profits recession -- not a consumer-lead downturn. As a result, it may well take real improvements in the economy -- increased capital spending and increased profits among businesses -- to turn improved consumer expectations into increased consumer spending in the months ahead. In this context, it is risky to assume that the economy will recover during the next few months, particularly if that assumption relies on the consumer to lead the way to that recovery.
While consumers continue to voice increasingly positive expectations for the U.S. economy -- particularly regarding their own communities and workplace and their own personal finances, they say they will act as they would if they expected the recession to continue. This suggests that many consumers want to see the economy improve before they change their spending/saving behavior. Obviously, this is an added risk to prospects for the short-term economic outlook, one that decision makers should consider as they plan for the months ahead.
