Why Consumers Are Underconfident

5 reasons the economy seems worse than it is.

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It doesn't add up. American consumers see gloom all around, with new consumer confidence numbers that are the worst since 1992. In other words, the economy is ailing worse than it was after 9/11, or after the tech bubble and stock market run-up that came crashing down early in 2001.

This, even though it's not clear we're even in a recession. Sure, quibbling over whether economic growth is positive or negative doesn't help anybody fill the tank or put food on the table, but overall, the economy isn't nearly as sick as consumers seem to think. Unemployment is a relatively low 5 percent, and some important indicators have recently turned from negative to positive. Some possible reasons why consumers feel more depressed than conditions warrant:

The freak-out factor. The standout features of today's economy tend to be pocketbook issues that consumers confront every day. Exhibits A and B are soaring gas and food prices, which hit a very tender lobe in consumer psychology. Each of those things alone represents a fairly small portion of the overall economy, but to many consumers they're a proxy for the whole economy going down the drain. Which it's not.

Inflation distortion. According to the Conference Board's consumer confidence survey, inflation expectations are at an all-time high. So inflation must be around 11 or 12 percent, right? Like where it was when President Ford vowed to "whip inflation now" back in the 1970s? Well, we've got a ways to go. Gas prices of nearly $4 per gallon make it seem much higher, but inflation is actually a very manageable 4 percent or so—including gas and food prices. One reason it isn't higher is that many goods, like cars, clothing, TVs, and other appliances are getting cheaper. Those price changes, however, aren't advertised on big signs at every intersection, so consumers don't notice nearly as much as they do when gas prices jump by 5 or 10 cents per gallon. (In one week.)

The invisible hand. Things going right tend to be much less visible to the average consumer than things going wrong. The low dollar has helped generate a surge in U.S. exports, for instance, which creates new American jobs and makes existing ones more stable. But companies cutting jobs tends to get a lot more attention than companies creating them. And even in towns where the local economy is strong, people often see the national headlines and figure their own good fortune won't last.

That thrifty feeling. The "wealth effect" is well-documented: When home values or stock portfolios are going up, people feel wealthier, often because their net worth—the value of their assets—is actually rising. So when home prices plummet, as they have in many markets, it makes sense that people feel poorer, and confidence goes down. But many homeowners who might feel gloomy are still in pretty good shape. Those who bought homes for the long haul and didn't take out a no-money-down loan over the past three years are still likely to enjoy decent long-term appreciation of their biggest asset. Just like the old buy-and-hold days. But if they were hoping to tap newfound equity to finance a powerboat, then yeah, they're probably feeling disappointed.

The unfamiliar bogeyman. Do most consumers really understand how collateralized debt obligations and credit default swaps have knocked 15 percent off the value of their home? Heck, many of the pros at the big banks that trafficked in these exotic securities don't even seem to know. So we've got an economy afflicted with a mysterious ailment that nobody has a quick prescription for. Once the problems work themselves out, it will seem a lot less scary. But until then, the devil we don't know is a frightening fellow. Who charges a lot for gas.