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Wednesday, September 26, 2012

Some Essential Facts About Consumer Confidence in September

by Lydia Saad and Dennis Jacobe

1. Americans’ confidence in the economy is undeniably up this month. Gallup reported this on Sept. 11, Sept. 18, and Sept. 25 in our weekly updates of the Gallup Economic Confidence Index. This is also evident in the Michigan mid-month report as well as in the Conference Board’s preliminary release of September data on Tuesday, both of which showed confidence rising more than analysts predicted.

2. Because the Gallup Economic Confidence Index is based on daily tracking of consumer attitudes, we can pinpoint the day that confidence increased. That day was Sept. 4, the first night of the Democratic National Convention. After averaging -27 in August, and registering -28 on Sept. 3, the Gallup Economic Confidence Index jumped to -18 on Sept. 4, and has mostly remained at or near that improved level.

3. Because Gallup Daily tracking includes political questions as well as economic ones, we can analyze whose confidence changed in an effort to understand why it changed. The data show that the rise in confidence this month has been almost exclusively due to soaring optimism among Democrats and independents who lean Democratic.

The Economic Confidence Index among Democrats had been ambling along at around +10 from August through early September. Then, in the week ending Sept. 9, spanning the Democratic National Convention, it surged 18 points to +24 and has since averaged +20 or better. A similar pattern has occurred among Democratic leaners, with a 22-point surge in confidence during convention week. Confidence rose somewhat less sharply, up 13 points, among independents who do not lean toward either party (“pure independents”), while it has held steady at very low levels among Republicans and Republican-leaning independents.
In summary, consumer attitudes markedly improved this month, primarily among Democrats, and the shift coincided with the start of the Democratic National Convention. This raises several questions.

Did economics drive Democrats’ renewed confidence, or did politics? That’s not clear. It’s possible that the Democratic convention themes praising Obama’s economic record and laying out economic goals for a second term were effective at convincing the party faithful that the economy is not so bad and getting better. Alternatively, the sheer excitement generated by the convention may have boosted Democrats’ optimism that Obama will win re-election, and thus their economic confidence rose in kind. This is the “rising tide lifts all boats” theory for what happened at the Democratic convention.

Will increased economic confidence help Obama politically? Not necessarily, in that economic confidence rose primarily among Democrats, who would ultimately vote for Obama anyway. The improvement among “pure independents” is more important, but this group represents a relatively small sliver of Americans (about 10%), many of whom won’t vote, and their confidence rose less sharply than Democrats’.

What does it mean for the economy? While economists continue to debate the significance of economic confidence measures, Wall Street continues to see confidence as a key indicator of future consumer buying behavior. The politically driven nature of recent confidence increases suggests that the relationship between economic confidence and consumer spending should be more highly discounted than usual.

Are these numbers sustainable? Given that the apparent spark for this month’s confidence surge was the Democratic National Convention, one would have expected the effect to be relatively short-lived. The fact that Democrats’ confidence has since remained higher suggests it had a transformative effect rather than a temporary one. Barack Obama also came out of the Democratic convention with a bounce in voter support that pushed him into the lead in the presidential race, and that has likely helped maintain Democrats’ optimism about the election. In turn, this has likely led many Democrats to put a positive slant on the economic data, suggesting that even marginally positive economic data may keep Democrats’ economic confidence high.

What are the implications? Right now, politics is playing an inordinately large role in the behavioral economic data. This suggests that the period between now and the election is a particularly hazardous time to apply traditional behavioral economic and political interpretations to key economic measures.

Monday, September 17, 2012

Could the September Unemployment Rate Fall to 7.9%?

Despite what was generally seen as a relatively poor August unemployment report, economic confidence is up, Wall Street is up, and the president continues to lead Mitt Romney as the elections approach. Given this context, imagine what might happen to economic and political perceptions if the government's seasonally adjusted unemployment rate falls to 7.9% in September -- nearly matching its lowest level since the president took office. While this seems unlikely based on Gallup's September polling, it remains a distinct possibility.

Gallup and the government showed the same adjusted unemployment rate of 8.1% for August. Gallup's unadjusted rate for August was also 8.1%, while the government reported an 8.2% unadjusted rate.

Gallup's unadjusted unemployment rate fell to 7.9% in mid-September -- down from 8.1% in August and its lowest monthly or mid-monthly average since Gallup began measuring it in January 2010. If the government's data show a similar 0.2-percentage-point decline, the BLS will report an unadjusted September rate of 8.0%. Adding a 0.2-point upward adjustment, based on the government's September 2011 seasonal adjustment, Gallup's seasonally adjusted unemployment rate for September would be 8.1%, while the government's adjusted rate would be 8.2%.

After increasing last month, Gallup's monitoring of the unadjusted workforce participation rate -- the percentage of the workforce that is employed -- shows no change in September. Gallup's last estimates of the participation rate contrast sharply with the 0.6-point decline in the government's unadjusted participation rate in August.

Based on Gallup's monitoring of the unemployment situation, odds seem pretty good that the September seasonally adjusted unemployment rate -- which the government will report on Oct. 5 -- will be 8% or higher. Gallup's results were close to the government's not only in August of this year, but also in September 2011 -- when Gallup's seasonally adjusted rate was 8.9% while the government's rate was 9.0%. Further, it seems unlikely that the government will report another major drop in the size of the workforce after showing an unadjusted decline of 1.27 million and an adjusted decline of 368,000 in the workforce in August.

Regardless, surprise seems to be the norm in the government's unemployment reports this year. So, it cannot be totally discounted that the government's unadjusted decline in the unemployment rate could be larger than Gallup's, that its seasonal adjustment could be smaller for September, and/or that it could show another decline in the size of the workforce. As a result, a 7.9% unemployment rate for September remains possible, if unlikely.

Friday, September 7, 2012

Did the U.S. Labor Force Shrink by 1.27 Million in August?

The government's seasonally adjusted unemployment rate for August matched Gallup's estimate at 8.1%.

However, the reason for the decline in the government's unemployment numbers is that, on an unadjusted basis, the government's data show a decline in the labor force of 1.27 million Americans and a 0.6% drop in the participation rate last month. If the Americans dropping out of the labor force were counted as unemployed, the unadjusted unemployment rate would have hit 8.9% in August, up from 8.6% in July.

On a seasonally adjusted basis, the decline in the labor force is 368,000. If we assume these Americans who simply got discouraged and dropped out of the labor force would otherwise be unemployed, the seasonally adjusted unemployment rate would have been 8.3% in August -- matching the consensus estimate -- and suggesting that most, if not all, of the improvement in the seasonally adjusted unemployment rate for August is due to the sharp decline in the size of the labor force.

While the government's seasonally adjusted participation rate hit its lowest level since September 1981 in August at 63.5%, Gallup's estimate actually increased by 0.5% to 68.1% in August from 67.6% in July. If the government's seasonally adjusted participation rate had increased in August as Gallup's did, then the seasonally adjusted unemployment rate would also have increased.

The government's Household Survey is not only volatile, but often hard to reconcile with the Establishment Survey. With the latter survey showing an increase of only 96,000 jobs in August, it is hard to see how the seasonally adjusted unemployment rate could drop from 8.3% to 8.1%, particularly when the number of Americans employed on a seasonally adjusted basis declined by 119,000 last month. More importantly, it strains credulity to think 1.27 million Americans left the workforce on an unadjusted basis in August. Nor does it make sense to see that there were 568,000 fewer Americans employed on an unadjusted basis in August, while the unadjusted unemployment rate fell to 8.2% from 8.6% in July.

Regardless, given the anemic 96,000 increase in jobs for August, it seems likely the Fed will flood the economy with money (QE3) once again when they meet next week. It also seems likely that the 8.1% seasonally adjusted unemployment rate is good news for the current administration politically. At the same time, the lack of face-validity associated with the August unemployment results suggests it is time for policymakers and the public to consider a new jobs measure, such as Gallup's Payroll to Population for the both the U.S. and the world.

Wednesday, September 5, 2012

August Unemployment Rate Still Not Looking Good

Friday’s unemployment report could have more impact on U.S. voters than the two national conventions leading up to it. In this regard, Gallup’s end-of-August unemployment data continue to suggest no change or, more likely, an increase in the government's seasonally adjusted unemployment rate for August when it is reported on Friday.

Gallup’s daily monitoring of the unemployment situation shows essentially no change in the unadjusted unemployment rate at 8.1% compared to 8.2% in July. In turn, this suggests that the government's unadjusted unemployment rate could decline to 8.5% in August from 8.6% in July. The government's measurement of the unadjusted unemployment rate has been within 0.1% of Gallup's findings in each of the past two years, but a drop of 0.5% in July’s unadjusted rate is necessary to bring the government's unadjusted rate down to Gallup levels.

If the BLS makes no seasonal adjustments in August 2012, as was the case in August 2011, the Gallup seasonally adjusted unemployment rate for August 2012 would be 8.1% -- assuming a similar decrease to that shown by Gallup, the BLS rate would be at 8.5%.

Gallup's data show the labor force participation rate to be increasing in August. In turn, that could have an additional negative impact on the unemployment rate for August if the government's data show a similar pattern.

The consensus forecast is for the economy to add 125,000 new jobs and for the unemployment rate to remain at 8.3%. Like Gallup’s estimate of an increase, this is consistent with today’s slow economy, Tuesday’s ISM report, and the continued high level of jobless claims.

On the other hand, trying to guess the U.S. unemployment rate has been very difficult in recent months -- the numbers always seem to come as a surprise. So, it does seem possible that the U.S. government could report no change in the unemployment rate -- assuming it also reports a sharp drop in the government’s unadjusted unemployment rate.

During recent months, Gallup's measurements have been more optimistic than those of the BLS. Barring a sharp reversal in this relationship, the government's unadjusted unemployment rate might be expected to stay the same or increase in August.

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