Why Sentiment Matters To Economic Recovery

There is a universal truth that often is overlooked by economists. It is this: perception is reality, especially when it comes to consumers and business people. Economists tend to take comfort in numbers. Think of it as their security blanket. They are consoled by things they can understand. That's why many are now predicting economic recovery, albeit at a snail-like pace.

Economists can find many signs to buttress their beliefs. Manufacturing has inched upward. Some businesses are hiring. Consumer spending has tiptoed upward. However, in every poll of consumers and business leaders, the mood is sour. To put it bluntly, they don't believe the economy is improving. Economic statistics won't convince them otherwise. They know what they know, even if it seems out of sync with reality.

I was reminded of this fact recently when the National Federation of Independent Businesses reported that its optimism index had fallen to an eight month low. A noted economist, William Dunkelberg, seemed perplexed. He said the results were "very inconsistent with the notion that the economy is recovering." Spoken like a guy who embraces numbers, but finds sentiment a touchy-feely concept.

Small businesses aren't convinced things are getting better for obvious reasons. Most have experienced shrinking sales and lower consumer demand. Banks are clamping down on loans to businesses. Congress has just passed a massive health care bill that puts new mandates on small businesses. Taxes are likely to head higher as the government grapples with the federal deficit. These business people are hunkering down for the worst.

In the survey by the NFIB, small business people cited poor sales as their top concern. Most said this is not a good time to expand. A majority reported unfavorable credit conditions. Many said it was not the right time to hire. No matter what economists are saying, these business people don't believe the numbers. Their reality is sales haven't improved. No amount of assurances from economists will convince them that good times are right around the corner.

Predictably, there was a lot of head scratching by economists after the poll was published. They argued that the economic data is at odds with perceptions. They were flummoxed that these business people didn't see that. They ignore that perception is reality, not the other way around. Changing perception is often more difficult than changing reality.

That is the crux of the problem the country faces today. Small businesses aren't alone in their perception of the direction of the country. Consumer indices are at or near all time lows. Large business leaders are cautious about the future. People simply aren't buying that things are getting better, despite determined efforts by the media and the Obama Administration to convince them the economic recession is over.

So how do you change sentiment? Think President Ronald Reagan. When he inherited runaway inflation, a weak economy and a nation in the throes of malaise, he spent a considerable amount of time talking up the country. The President took to the airwaves to assure Americans the country could rise above any obstacles.

What is missing today is that President Obama has taken just the opposite tact. He and his allies have been nabobs of negativism. They have told us that unemployment will not come down soon. They preach higher taxes. They trumpet more government programs instead of American initiative. Some have mentioned that America cannot expect to continue to dominate the world economically forever. Does that sound like optimism?

This raises another question: why would the President and his minions deliberately talk down the economy? The answer should be obvious to even his most ardent supporters. President Obama sees the current economic crisis as an opportunity for more government intervention, more government programs, more government control. It is an inescapable conclusion that we ignore at our own peril.