Floyd Norris: "In previous recessions, there has been widespread pessimism about the overall economy. But this recession was the first since the survey began in 1967 when more people expected their own incomes to fall."

October 1, 2010

The Recession Is Over, but Pessimism Still Reigns

By FLOYD NORRIS

AMERICANS became more pessimistic about their chances for higher incomes during the Great Recession than at any time in the past 45 years. That pessimism has eased, but still remains high.

The consumer confidence index fell in September, according to preliminary figures released this week by the Conference Board. That decline was largely because of lower expectations.

The expectations index is based on three questions about what consumers expect to happen over the next six months — whether business conditions will improve, whether there will be more or fewer jobs, and whether they expect their own incomes to rise or fall. In September, for the first time since July 2009, there were more negative than positive responses to all those questions.

In previous recessions, there has been widespread pessimism about the overall economy. But this recession was the first since the survey began in 1967 when more people expected their own incomes to fall.

Before this recession, no survey ever showed as few as 15 percent of Americans optimistic about their own prospects. But since October 2008, when the financial crisis intensified after the failure of Lehman Brothers, the figure has been below 15 percent. Similarly, the proportion of pessimists had never been as high as 15 percent before the financial crisis, but it has been above that figure for the last two years.

At the height of the financial crisis, in March 2009, less than 8 percent of Americans expected their incomes to improve, while about 24 percent anticipated a decline. The figures released this week showed about 10 percent were optimistic about their incomes, while about 16 percent still expected a fall.

The pessimism in 2009 came as unemployment rose above 10 percent in October, a figure it is still near. But the rate had been higher in 1982, when there was less pessimism. In part, that may reflect the fact that many people who kept their jobs in the recent recession were forced to accept pay cuts, something that had not happened in earlier downturns.

The rise in pessimism has also come as major asset categories have performed poorly. The median sales price of existing homes is lower now than it was five years ago. Before this recession, home prices always rose at a rate of at least 2.5 percent a year over five-year periods, according to data the National Association of Realtors began collecting in 1968.

And despite rising 8.8 percent in September, the Standard & Poor’s index of 500 stocks remains below where it was five years earlier. There was a similar prolonged period of weak stock prices in the 1970s, but stocks were far less important then to most Americans.

Stocks are more important now because more people see their retirement depending on their own investments. That change came as fewer companies offered defined-benefit pension plans and more people had 401(k) defined contribution plans, which were often invested in stock mutual funds. By early 2000 — as the stock market was peaking — 43 percent of household financial assets were in stocks, triple the proportion in the mid-1980s.

The Federal Reserve estimates that Americans had $43.8 trillion in financial assets at the end of June, 15 percent below the figure for September 2007, shortly before the recession began.

Floyd Norris comments on finance and economics on his blog at nytimes.com/norris.