The stock market is like a theater where traders, portfolio managers and individual investors act out the sentiments felt in the broader economy. In more placid times the show can be rather ho-hum, but this past week’s brutal selling on Wall Street, despite its precipitating causes, is a reflection of ongoing pain on Main Street.
Economists believe the stock market is a leading indicator of investor expectations. While the headlines have focused on the Fed’s Operation Twist and Europe’s sovereign debt and banking crisis, the negativity fully matches sentiment on Main Street.
A Gallup poll this week, one of a series surveying the U.S. economy, shows that a large majority of Americans, 61%, expect the economy to be no better one year from now than it is today. This is a complete reversal from a similar poll taken in 2009 at the end of the recession, when 65% of Americans expected the economy to be better or fully recovered by 2010.
While the National Bureau of Economic Research has not officially weighed in on the question, 80% of Americans surveyed by Gallup have already declared we’re in a recession. (The Economic Cycle Research Institute, an allied but independent forecasting group, reported slippage in its weekly leading index Friday.) The negativity has not moderated much from the peak 84% who told Gallup we were in a recession in 2009–when, indeed, we were.
The glumness amid nonrecession (unless of course we actually are in a recession) is likely the result of dashed expectations. Historically deep recessions are followed by robust recoveries. Despite all the stimulus (and some would say because of it), the recovery has been anemic. A Gallup survey released last week shows that economic confidence and consumer spending never really picked up from the time the last recession ended. Indeed, in Gallup’s survey economic confidence has fallen to a level last seen in February 2009, when Congress passed a $787 billion stimulus bill. Between now and then confidence essentially flatlined for three years.