National Economy: Is It All About Perception?

CNN's Ali Velshi and Erica Fink recently did a comparison of what they considered to be five key measures of the economy. Using what they call the "CNN Real Feel Economic Index," they looked at jobs, personal income, personal savings, industrial production, and home prices.

According to Velshi and Fink, "the U.S. economy, more so than other worldwide economies, is dependent on spending decisions made by consumers. Consumer behavior drives spending habits, spending habits drive corporate profitability, and corporate profitability drives the stock market."

Looking at this interconnectedness, they wanted to see if the consumer's perception matched the reality of the U.S. economic situation. Charting their five indicators on a scale of 0 (the worse) to 10 (the best) to see how the indicators have changed since 1980, they wanted to see if all the "fears and concerns are justified." Their ratings of the current situation were as follows:

Jobs: 4.6 - The worst was in November 1982 with an unemployment rate of 10.8% and the best was in April of 2000 with an unemployment rate was 3.8%. The current national unemployment rate is around 7.6%.

Personal Income: 3.2 - "Pew Charitable Trusts' Economic Mobility Project found that looking at the period 1974 to 2004, salaries actually went down 12 percent, from $40,210 to $35,010 (in inflation-adjusted dollars)."

Personal Savings: 3.3 - Economists fear that although the saving rate has gone up in the last few months to 3.6%, it is not because Americans are earning more. It appears that most Americans are hunkering down and spending less. The highest savings rate was in 1981 at 12.2%.

Industrial Production: 0 - The harsh score for this indicator of what the U.S. produces in tangible goods is due largely to the troubles facing the Big Three automakers.

Home Prices: 0 - This other harsh rating is due to the 6% annual drop in home prices, the biggest drop in the history of the index going back to 1975.

Obviously Velshi and Fink paint a grim picture. The numbers don't look good and the bad news continues to dominate the headlines. This week began with the stock market dipping into the lowest numbers since 1997. But the CNN correspondents also point out that the unemployment rate during the Great Depression was 24% and fortunately America is far from that number. They also point out that the plunge in home prices is largely due to the unprecedented rise in home values over the last five years.

Austin-American Statesman financial columnist Scott Burns recently challenged that things aren't as bad as the numbers indicate. He used the comparison of wealth and income. While he concedes many Americans have seen their wealth decline, their actual standard of living may not be as compromised as they think. While many Americans find themselves "upside down" in their home value, he doubts the average American's standard of living has dropped by 20 percent.

He uses retirees as an example of how the balance sheet looks bad, but their actual day-to-day living circumstances remain mostly unchanged. "...before you allow fear to run free, check the income that supports your actual standard of living."


Ki works, and lives, in Austin Texas. His website has thorough descriptions of Austin real estate. The site also presents a graphical search of the Austin MLS along with a free mortgage calculator.