US Consumer Pessimism May Lead to Economic Downturn

According to an article published in the April 11th edition of Business Week Online, there is a general pessimism among U.S. consumers concerning the future of the economy despite moderate growth trends that imply economic stability for the remainder of 2007. Although unemployment is currently at 4.4% nationwide, a low since 2001, and 180,000 new jobs were created in March alone, the public still feels shaky about what the coming months will bring. Some obvious reasons for their uncertainty is the Iraq war and the continually changing price of oil. Just how pessimistic one is seems to be related to one’s annual income, namely the wealthy are the least pessimistic of all, while the poor hold the most doubts. (Coy, 2007)

The discrepancy between analytic forecasts and general public opinion should not be taken lightly. Consumer pessimism has the potential to become a self-fulfilling prophecy. Greater pessimism leads to less consumption because people are worried about what the future might bring so decide to save more, which lowers aggregate demand for goods and services. In turn, less demand means less revenue for firms, which will eventually lead to less job creation, and an overall downturn in the economy. In essence, what the public expects to happen, will indeed happen. Their expectations will become their reality due to the self-protective actions (ie less consumption) they take today. In fact, less consumption could cause a significant fall in GDP, as consumers make up roughly 70% of all U.S. GDP. (Coy, 2007) So despite a rather optimistic outlook among forecasters for 2007, public uncertainty and fears for the future may sway the economy downward in very real terms.

Source: Coy, Peter. “The Economy: Why So Gloomy?” Business Week Online. April 11, 2007. Reference URL: http://www.businessweek.com/investor/content/apr2007/pi20070411_639834.htm?
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