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Monday, April 26, 2010

Why Nibble at the Safety Net?

Gallup last week reported that one in five American workers is underemployed and a similar percentage of those with jobs think they are very or fairly likely to lose their job in the next 12 months. While good personal financial management suggests people should have savings to handle six months of unemployment, few Americans can meet such a standard. Nearly half say they could only last up to one month without a paycheck until encountering significant financial hardship and this increases to 8 out of 10 for those making less than $30,000 a year.

With so many people living on the edge of real financial hardship, many recent debates over how the nation might make cuts in the social safety net seem totally out of touch with today's main street reality. For example, the president signed an extension of emergency unemployment benefits on April 16. But, the bill was delayed as the Senate battled over whether the benefits should be paid for by other budget cuts or added to the federal budget deficit.

Similarly, Saturday's Forbes on Fox held a discussion about doing away with the school lunch program. Arguments over the quality of food provided were mixed with those about its inefficiency leading some participants to suggest the whole program should be eliminated.

There are good reasons to be concerned about the federal budget deficit. Tomorrow, the president's commission will meet to begin its deliberations. While its challenges are daunting, hopefully, it will focus on the big issues surrounding the deficit.

On the other hand, those on Wall Street do themselves no good -- nor do they bolster the case against big government -- when they argue for nibbling on the edges by cutting school lunches and against extending unemployment benefits while so many American workers are either underemployed or fearing for their jobs.

Wednesday, April 21, 2010

Dick Bove's "Death Wish"

President Obama goes to New York's Cooper Union -- the place he first addressed the financial crisis two years ago -- to push financial regulatory reform. Probably a good idea given the stronger support for regulating Wall Street as opposed to large banks.

The SEC's civil fraud charges against Goldman also play into the potential "legislative-push" benefits associated with demonizing Wall Street whether by coincidence or not. However, Dick Bove, Rochdale Securities, argued in a research report Monday, as well as in an interview on CNBC, that all of this effort to demonize Wall Street and banks is a "death wish . . . setting the stage for collapse one more time."

Bove may have a point when he references financial collapse. Gallup survey data show that while surging stock prices may have returned confidence to many on Wall Street, Americans' confidence in banking remains at essentially
historically low levels on main street.

The Senate plans to take up financial reform legislation in the next few weeks. In the meantime, it looks like political forces on all sides of the issue are likely to pull out all stops to get their way. However, as they do so, everyone should keep in mind where the financial system and the economy stood less than two years ago -- not so long after President Obama made his last trip to Cooper Union.

Confidence is key to financial stability and economic recovery -- right now it remains fragile. Things said by all sides in the midst of a heated political debate can have serious, if unintended consequences. The reputational fallout could extend to community and regional banks that had nothing to do with the financial crisis. As a result, Dick Bove's "Death Wish" assertion may not be as unthinkable as one might wish.

Tuesday, April 20, 2010

Liberals More Enjoy Spending

Gallup's investigation into the behavioral economics of the "spending new normal" finds that only about one in three Americans (35%) say they are the type of person who "more enjoys spending" than saving. However when looked at by ideology, nearly half of self-identified Liberals say they more enjoy spending compared to about one-third of both Moderates, and Conservatives.

And, this is NOT a new phenomenon. Gallup asked the same question in April 2001 with essentially the same finding: a disproportionately higher percentage of Liberals -- more than half -- said they more enjoyed spending nearly a decade ago. The across-the-board decline in the percentage of Americans acknowledging their preference for spending over most of the past decade also suggests that the financial debacle of the past couple of years has altered many Americans spending/savings preferences -- no matter their ideology.

Politically, this Liberal spending preference may help explain, at least in part, why Liberals generally tend to support increased government spending while the Conservative saving preference probably explains why they tend to hold the opposite position. No matter the individual government program, this difference in the psychological predisposition likely plays an important role in the behavior of these ideological groups.

Importantly, part of the "new normal" shift may include a movement in moderate spending preferences to be closer to those of Conservatives than Liberals. This was not the case a decade ago. With the federal budget deficit being one of the top four issues likely to influence how Americans vote for Congress, this suggests that those candidates having a basic preference to save, not spend, are likely to do well in this year's elections, regardless of their political party.

On a more light hearted note -- and keeping in mind the basic difference in spending preferences -- it seems the nation's struggling retailers, no matter their ideology, might want to consider looking for ways to bring more liberals into their stores.

Monday, April 19, 2010

Providing Behavioral Insights Into the Economy

For many decades, Gallup has collected attitudinal information about the economy. As with Gallup’s political data, Gallup’s historical economic data has reflected the average American’s view of the economy. In turn, economists have used such information about consumer attitudes to enhance their efforts to prognosticate actual economic performance.

A few years ago, Gallup undertook an unprecedented effort to move from simply collecting attitudinal economic information to developing a new consumer behavioral database. Working with Nobel Laureate Danny Kahneman, Gallup designed a new system for measuring and monitoring consumer behaviors. In order to make this work, Gallup began interviewing 1,000 individual consumers on a nightly basis, not only about their attitudes, but also, about both their observed and personal behaviors.

As Gallup’s Chief Economist, I utilize this vast new behavioral data source and other Gallup polling to provide insights into the U.S. economy when writing for and the Gallup Management Journal. Often the behavioral economics basis of this analysis provides both a different slant and unique insights not generally discussed by many economic observers. The objective of this blog is to do the same, but informally, and with a little more edge.

For example, Gallup’s self-reported consumer spending measure showed a 7% year-over-year increase in March. This was generally consistent with the 7.6% year-over-year increase in retail sales and the 9.2% increase in chain store sales that made so many on Wall Street almost giddy about the return of the consumer.

However, Gallup's behavioral data show that upper-income consumers did not participate in this March spending surge. Although it may not always be P.C. to say, there cannot be a sustained increase in consumer spending without the participation of upper-income Americans.

In turn, those jumping on the "return-of-the-consumer" bandwagon may be wise to avoid the behavioral economics tendency toward "overconfidence" -- the returning consumer could be a "zombie."

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