Fearing the R-word

Among elected officials, there is rarely a desire to be the first to use the "R-word": Recession. While the word does not evoke the same fear of breadlines and shantytowns that Americans have been trained to associate with a Depression, the term still reminds people of slim times and cutting-back.

Friday the University of Michigan and Reuters released their headline confidence index: the Index of Consumer Sentiment. The measure tracks how people feel about the economy at any given time. The index sat at a

bout 80 points just before the current recession began in December of 2007. Since then it feel to a low of  55.3, a level unseen since 1980.

Confidence is beginning to recover, reaching 69 points in the preliminary June estimate. This good humor comes even as unemployment continues to rise and economists tell us that Americans have "lost their spirit."

Yet more interesting than the immediate swing in confidence is the increased variation when we do enter recessions. Beginning in the 1980s, peoples confidence became markedly different during recessions (as timed by the NBER) then during the rest of the business cycle.

The chart below gives the average level of consumer confidence by decade. It then provides decade-long averages for both recessionary and non-recessionary periods. Starting in the 1980s the gap in confidence between recessions and the rest of the business cycle becomes stark. While the current recession has been deep, the 1990's and even early 200s saw mild recessions associated with large deterioration in confidence. Consumers look more manic than they once did.

Source: Author's calculations, University of Michigan/Reuters Index of Consumer Sentiment, National Bureau of Economic Research Business Cycle Dating