Politicians are putting a lot of stock in plans and legislation designed to resuscitate the economy, proposing everything from tax credits for businesses that hire to expanding and expediting trade agreements with other nations.
But will passing another stimulus bill restore consumer confidence, the absence of which has severely hampered economic growth and progress toward recovery?
Experts aren't so sure. Despite the fact that the economy is growing—albeit, extremely slowly—and the economy hasn't begun to shed jobs yet, consumer sentiment remains in the dumps. Americans feel slightly more secure in the workplace, but on the whole they feel "worse off" financially than last year, according to a recent survey by Absolute Strategy Research (ASR). Consumers are also more pessimistic about the coming year, largely due to worries about the rising cost of living.
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"The issue is 'Why aren't people spending?' and 'Why aren't they confident of their ability to spend more?'" says Robert Shapiro, fellow at the Georgetown Center for Business and Public Policy at the McDonough School of Business and chairman of Sonecon, LLC. "We've had a modest recovery, including in employment."
But that hasn't been enough. According to experts, the ASR survey underscores the deep scars of the Great Recession, in particular how the credit crunch and housing meltdown have fundamentally changed Americans' opinions about debt and housing as a foolproof investment.
"People still feel very insecure, they're worried, and it's changing their attitude about debt," says David Bowers, global strategist and managing director of Absolute Strategy Research. "Although jobs initiatives are to be welcomed, this is a reminder of just how severe a headwind housing has become."
Household worth fell about $16 trillion from peak to trough, but only about half of that loss has been made up, which helps explain why Americans feel less wealthy and more insecure. Moreover, a third of all homeowners in the ASR survey believe their home is worth less than they paid for it, and 27 percent believe they have an underwater mortgage.
Why do housing values really matter? According to the Fed, the bottom 80 percent of American households hold only 7 percent of the total value of all financial assets in the economy. But that same 80 percent holds about 40 percent of all residential real estate assets, which means more Americans rely on and perceive their wealth from the value of their home.
"Home equity is the only widely held asset in America, and home equity is very sensitive to shifts in housing values," Shapiro says. "You have a very powerful negative wealth effect going on."
In previous recoveries, a run-up in housing values made Americans feel wealthier and more apt to spend, even though wages had stagnated. This time around, the reverse has happened. Wages have stayed flat, but housing values have plummeted.
When housing takes a hit, so does Americans' perception of wealth. If they feel less wealthy, they're likely to spend less, which feeds into a vicious cycle of less spending, less economic growth, and less confidence.
"It's a feedback loop where weakness of growth, unemployment, household wealth not doing well, and the political uncertainty surrounding future regulatory policy all make for low consumer confidence," says Greg Daco, principal economist at IHS Global Insight. "Consumer confidence feeds into lower consumer spending, which leads to lower sales for businesses, which then have less means to reduce costs in other ways, so they might end up reducing payrolls."
But while Americans remain pessimistic about the prospects for dramatic improvement, most don't feel the economy is destined to take a nosedive either, perhaps one slightly comforting nugget in all the dismal data. A recent survey of financial professionals revealed that based on interactions with clients, more than 54 percent believe the economy will remain lodged in its current state of limbo.