Do economists know anything at all about consumers?
They sure act like they do. There are endless efforts to measure spending, saving, plans for the future and everything that makes consumers feel elated or glum. And all of that matters, because consumer spending still accounts for two-thirds of the entire U.S. economy.
But sometimes the soothsayers should just admit they have no idea what's going on. Such as now. In the latest University of Michigan survey, for instance, consumer confidence rose modestly, even though economists had been expecting a decline. Yet three days earlier, the Conference Board's consumer confidence index plunged, as hopes for a robust economic recovery evaporated. So according to the data, consumers are both upbeat and depressed.
Consumers have been throwing economists knuckleballs all year. One of the biggest economic puzzles at the moment is why consumer spending has remained strong so far in 2013, even though a hike in the payroll tax at the start of the year reduced virtually every worker's paycheck. On top of that, government spending cuts that went into effect March 1 have caused fresh worries about economic growth.
Yet consumers seem not to care.
"We were caught off guard by the strong spending data in January and February," economists at Bank of America Merrill Lynch acknowledged in a recent report. "So far, the payroll tax increase has not had a noticeable impact on spending."
One possible explanation is that Americans are so tuned out they don't even know their taxes went up. In a recent survey by Bankrate.com, 48 percent of Americans said they didn't even notice the payroll tax hike. That might be because some companies didn't increase the tax withholding on their employees' paychecks right away. It could also reflect the fact that many people use direct deposit to bank their paychecks, and don't eyeball the numbers every month. Still, you'd think across-the-board tax hikes ought to get people's attention, especially given the saturation news coverage of the fiscal-cliff standoff late last year, which led to the tax hikes.
Consumers also feel a lot better about certain improvements in the economy, especially the end of the housing bust. Homes are gaining value once again, which makes homeowners feel better off. A buoyant stock market also makes people feel more cheerful, even if their only holdings are retirement funds they won't tap for years. So maybe consumers feel they're gaining more from those types of improvements than they're losing through higher taxes.
It's also possible there's a swelling underground economy that makes families less vulnerable to tax hikes, because they're earning more of their income in cash that doesn't get reported to the government. There's always been a basic level of under-the-table activity, but some economists think that has grown because many people thrown out of work are now earning income from informal jobs such as computer repair or other things that don't require payroll processing.
A darker scenario is the possibility that there's simply a delayed reaction to developments that are sure to sap the economy at some point. Consumers can't create money after all, and data does show that consumers have financed at least some of their recent spending by saving less, with the savings rates falling to a dangerously low 2.6 percent. (The historical norm is about 5 percent, and some economists say it should be 10 percent or higher.) If consumers are merely drawing down bank accounts to finance consumption, it probably means some kind of payback is coming, along with an unambiguous drop in consumer confidence--in all measures of it.
A sunnier view is that consumers are simply so resilient they'll do whatever it takes to keep spending, which in turn will boost business throughout the economy, creating more and more jobs. All consumers aren't the same of course, and it could be the case that some are optimistic, others are morose, and it's not nearly as easy to generalize about them as we wish it were.
Rick Newman's latest book is Rebounders: How Winners Pivot From Setback To Success. Follow him on Twitter: @rickjnewman.
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