Confidence Up; Expectations the Key

Today’s news from the University of Michigan-Thomson Reuters index of consumer sentiment was surprisingly good. Surprising, that is, if we had not been paying attention to the details of other recent announcements. The jump in confidence to 83.1 at the beginning of October from September’s 78.3 fits neatly with the steady but largely hidden drumbeat of news we have been reading over the last tow to three weeks. The headline numbers may not be inspiring, indeed they can be quite depressing, but buried in the fine print there are signs that something is stirring.

Quite how this will manifest itself in those headline numbers over the next few months it is way too early to tell, but when we isolate confidence, employment, and outlook at the household level a change is unmistakable. Things are getting better.

Confidence is now at its highest since before the crisis five years ago. Debt levels appear to be down to where people feel comfortable. Foreclosures are waning and are at a pace not seen in four years. Jobs are more abundant. People are reporting they have found work in numbers not seen for those same four years. And the headline unemployment rate is steadily heading down, albeit far too slowly for anyone to laud too loudly.

The role of expectations in an economy have been theorized about endlessly over the years. Entire theories hinge on them. From the absurdity of the Lucasian starry eyed vision of so-called rational expectations to the far more pragmatic or worldly views of Keynes economics has tried to fit into its various competing ideologies a way for attitudes to do their work. After all the entire economic enterprise is an attempt to understand the why, how, and what of production and exchange between human beings.

That some of these attempts have been farcical is not the point. Even alchemists can take pride in being situated in the steady accumulation of better theories that brought about modern chemistry. So even a neoclassical economist can take comfort at having contributed in some small way to the emergence of a more modern economics with sensible explanations of human interaction and solid connection with reality. Despite its contorted view of humanity and its dangerous denial of social context even neoclassical theory rests on a view of expectations. It has to. In the face of insoluble uncertainty every one of us adopts tricks, habits, rules of thumb and other devices to guide our activities. Were we lacking this tool kit we would never be able to take a step or make a decision. Those decisions are based on what we expect the outcome to be. Oftentimes the actual outcome and our expectation are at odds. In that case we learn, adapt, and refine our behavior.

It is thus the link between expectations and consequent actual outcomes that provides the basic mechanism for economic progress. From this perspective the economy is one giant learning device for exploring the unknown. The fewer errors it makes the greater the wealth it provides.

Meanwhile, in the wake of today’s news it will be interesting to watch consumer spending as we head into the holiday season. Rising confidence may portend an acceleration in consumption and the return, at least in part, of the missing demand that has dogged the economy since the bottom fell out.

We can hope anyway.

 

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