Remember we are in a Recession caused by inadequate consumption

This is from Reuters reporting Zogby poll results.

1. The Reuters/Zogby Index, which measures the mood of the country, fell dramatically to 87.9, down from 95.5 in April, as nine of the 10 measures of public opinion used in the Index dropped.
   
2. Concerns about the direction of the country and personal finances rose sharply, and dissatisfaction with Bush, Congress and the administration's economic and foreign policy all climbed.
   
3. Bush's approval rating fell 4 percentage points to 23 percent, a record low for pollster John Zogby, and positive marks for the U.S. Congress fell 5 points to tie an all-time low at 11 percent.
   
4. The number of Americans who believe the country is on the right track fell from 23 percent to an abysmal 16 percent, another record for pessimism, as uncertainty about the economy and rising gas prices fuelled growing doubts about the future.
   
5. Consumer confidence fell to a 28-year low this month as rising prices strained household finances, the economy shed jobs, the housing market struggled and the cost of gasoline rose to $4 a gallon.
   
6. The poll found the percentage of Americans who feel good about their personal financial situation this month fell from 53 percent to 46 percent. Zogby said a majority of Americans expect gas prices to eventually hit $5 a gallon.
   
7. Positive marks for the Bush administration's foreign policy also tumbled, from 24 percent to 19 percent, and approval ratings for economic policy fell from 16 percent to 12 percent.
   
8. Slightly fewer Americans feel safe from foreign threats and are proud of the United States, and the number of Americans confident their children will have a better life dropped from 65 percent to 59 percent.
   
9. The number of Americans who feel secure in their job essentially remained the same this month, declining slightly from 66 percent to 65 percent, well within the poll's margin of error of plus or minus 3 percentage points.
   

The index combines responses to 10 questions on Americans' views about their leaders, the direction of the country and their future. Index polling began in July, and that month's results provide the benchmark score of 100.

A score above 100 indicates the public mood has improved since July. A score below 100, like the one this month, shows the mood has soured since July.

With these reports, consumers are not going to increase purchases.

Demand (GDP) = Consumption + Investment + Government purchases.

Net Consumption makes up about 70% of total demand. The other 30% consists of net Investment and Government spending. So total demand is almost entirely dependent on current Consumption and the anticipated consumption that Investors base their Investment plans on. Look at item 5 above. Investors see nothing hopeful to expand net Investment for. Any additional funds given to Investors will be invested outside the U.S. where economies are growing.

Until there is a reason for total demand to increase, the economy is not going to turn around.

The rest of the poll results are largely caused by most people recognizing that economically we are in for difficult times. Oil at $132 per barrel is not a source of consumer confidence.

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Addendum May 22, 2006 7:06 CDT
The NPR Morning Edition just reported that credit card companies say a lot of people have started using credit cards to pay for food and gasoline. This means that consumers are not going to increase general consumption. They are stretched just buying essentials. That is not a good sign for an economy already in trouble because of inadequate consumption.

This is in addition to the report several weeks ago that late credit card payments are increasing.

This economy will not come out of the recession until consumption begins to increase. Instead, as long as nothing is done to get more money to consumers, we are going to see an increase in unemployment (which itself will decrease consumption) and a decrease in total GDP.

Ignore per capita GDP - look at Median Hourly Income

Here is why the public doesn't think the economy is doing well. That's because it's not doing well. From Monster dot com story back in September 2006:

This week, the New York Times ran a story (log in required) that detailed just how much the economy has grown -- and how little the average Joe’s wages have kept up with this growth. It’s not a new topic, but the article revealed some sobering facts:

* After factoring for inflation, Americans’ median hourly wages have declined 2 percent since 2003, while productivity, the amount an average worker produces in an hour, continues to rise.

* Workers’ pay now makes up the lowest share of GDP since the government began recording the data in 1947. In the meantime, corporate profits are at their highest share since the ’60s.

In plain English: Most of us are working harder but being paid less (comparatively speaking) for it. According to the article, the disparity has a lot to do with factors like the decline of unions, globalization and outsourcing, and technology.

As pointed out by Kevin Drum, Gross Domestic Income divided by the total number of people in the U.S. gives the number usually reported as saying the economy is doing well. Unfortunately, that is an average figure. Averages are effected badly by outliers, that is, a single number that is a long way from the average/

Say three people earn $100 a week each. The total paid is $300. Then a month later, two get pay cuts to $75 per week and one get a raise to $150. The total paid is still $300 and the average paid per worker is still $100 a week, but two workers are worse off.

But in the second case, the Median wage, that is the wage of the middle wage earner is $100 in the first case and $75 in the second case.

So look at the second paragraph quoted from the New York Times above. While GDP has gone up, the net profits are all going to corporation rather than to labor. The corporations are either hording the money, spending it on capital or on buying other companies (more of the latter) or increasing the payments of dividends and top management pay. The economy is becoming more productive, but the results of the productivity are not being shared with the workers who actually make the products and services. This is a distribution problem. And since the economy has been being supported by consumer spending rather than investment spending, the economy cannot expand as rapidly.

In the long run, the economy produces to feed demand, and most demand is consumer demand. When consumer demand slows, so does the economy. Much of the increased consumer demand in the last few years has come from the housing boom, but with the slow collapse of the housing bubble, that source of funds is drying up. [I suspect this is why I have been getting a lot more offers for refinancing or second mortgages on my house.]

I am not going to predict an economic collapse. Things are too complicated for that. But the economy is slowing down its rate of growth, and will not pick up again soon. All I will really say for sure is that the general population that thinks the economy is not getting better is right and has been for several years. What we have been getting has been propaganda to try to get us all to spend more, but since the median income has been stagnate or even dropping, that is silly.

Right now sensible people will be getting out of debt as fast as possible. Individually that is the best idea. For the economy, it means that wages have to go up or we are all in trouble.