With the rush to pass the stimulus packages in various countries, politicians are repeatedly stressing the seriousness of the recession to spur various levels of government into action.
The problem with this is that the more politicians use adjectives like grim and unprecedented and draw comparisons to the great depression the less consumers spend and the worse consumer sentiment gets. This affects how business thinks about investing how consumers shop for goods and ripples up through the economy to prolong and perhaps accelerate the situation.
So in order to push through stimulus packages to fix the economy they may actually be hurting it in the long-run. This is most evident in the consumer sentiment index, which, although marginally higher in January still reflects consumers ongoing fear about the direction of the economy. Consumers now,
” anticipate the deepest and longest recession in the post-World War II era, but consumers do not expect the economy to sink into a 1930s-style depression…”
But in the face of unsettling jobs numbers, consumers are still unsure of the direction of the economy and are looking for direction that there is hope on the horizon. That hope may come in the form of a stimulus package, but we must still keep in mind that comparisons of these current conditions with the Great Depression will not help to spur confidence that government spending will help the situation.
In an analysis of Friday’s jobs report Globe reporter Barrie McKenna cites a University of Michigan professor that notes even though the job losses are large, they more accurately compare with the early 90s recession, not even the recession of the 80s. The reason says Mark Perry is that even though the raw numbers appear unprecedented, in the 1980s there were only about 93 million Americans working in the labor force versus approximately 154 million today. So on a percentage basis there is a distinct difference and a real danger of using raw numbers out of context for other purposes.
What all this comes down to is that as Professor Perry states:
“We’re talking ourselves into a more severe recession than this really is,” he said. “A lot of this is psychological, and that plays into consumer spending.”
But with the pace of job cuts accelerating, market watchers expect that next month’s jobs report will be even worse. One final thing to keep in mind is that these stats tend to be trailing indicators of how the economy was doing. That being said, any commentary on these upcoming numbers has to be framed judiciously so as not to choke off consumers and businesses willingness to spend.