A recent survey by the University of Michigan shows a rebound of consumer sentiment from the low last summer to almost its long-term average. The survey asks people how they see things going over the next five years and apparently, most people aren't in a bad mood at all.
This is good news because the economy can be heavily influenced by the mood of the people in it. If people are fearful, mad or just uncertain, they tend toward less economic activity. This can become a downward spiral as the less they spend, the worse the economy becomes, giving rise to more fear that just makes things worse. Human emotions often influence our behavior in what the legendary economist John Maynard Keynes called our animal spirits.
When things go awry and recessions occur, the emotions that are typically muted surface to change behavior. For example, when AIG bonuses became front page news, the issues of fairness and corruption were laid on the public table for all to see. The result was a significant emotional reaction that was enough for the House of Representatives to push unprecedented legislation directed solely at a handful of AIG employees. This was hardly the first or largest case in the ongoing debate on executive pay, but the mood of the people was already so bad that the idea of employees that should be taking blame for this mess should get million dollar pay-days pushed people over the edge.
The tonic for this economic illness is a solid dose of confidence. When Roosevelt said, "The only thing we have to fear is fear itself," he hit the nail on the head. That's just the elixir people need when they are facing fear. Recently a well-orchestrated message of confidence came from the Federal Reserve, the Treasury and the president. Even the more vociferous politicians, those that were on the forefront of saying how bad things were, stopped talking down the economy. The numbers from Michigan show that it worked. People are more confident than they were just a few months back and that will help the situation considerably.
Whether or not we should be this confident is best discussed later – maybe after the recession has ended. (To learn more about consumer confidence and how it affects the market, read Consumer Confidence: A Killer Statistic)