A matter of economic confidence

'What people think does matter'

In today's economic climate, consumer confidence - the perception that things are OK, or at least will be - is a rare commodity.

As confidence drops, economic indicators drop. Then as economic indicators keep sagging, confidence keeps lagging. It's a vicious cycle.

"What people think does matter," Flathead Valley Community College economist Gregg Davis told those gathered for a recent economic forecast seminar in Kalispell. A healthy economy depends on people spending their income, investing their "household wealth" and making plans for their expected future income, he said.

But the American public's perception of security has tanked, putting the squeeze on spending.

So what's the fix?

"There is no fix. There's not a lot of positives, there's no silver bullet," Davis said.

"Consumer confidence is everything - not corporations, not the government," he said. "People clamp down on their spending when the value of their home is down, when there are layoffs, when they're tight on credit."

Although in general Montanans are more optimistic than the rest of the nation's consumers, that confidence started falling sharply in December 2007.

From December 2007 to December 2008, Davis said every indicator of consumer confidence in one Montana study plummeted: People's assessment of current financial situation, down 18 percent; financial position for the next 12 months, down 6 percent; Montana business conditions for the next 12 months, down 35 percent; Montana business conditions the next five years, down 22 percent.

And those who thought the next 12 months would be a good time to buy a car, major appliance or house? Down 18 percent.

In this case, Montanans were a year ahead of the National Bureau of Economic Research, which didn't declare the recession until Dec. 11, 2008.

Skyrocketing unemployment rates have gotten a lot of press lately, but unemployment is what Davis calls a lagging indicator - it changes only after trouble has tumbled through other business sectors.

Raw rates can exclude people who have used up their unemployment benefits, whose work hours or pay were cut, who gave up looking for another job.

Flathead County's rate is alarmingly high. At 8.7 percent in December, it matched the nation's unemployment in 1930 - two years before the height of the Great Depression.

For more recent perspective, consider this: During the still-strong economy of summer 2007, the Flathead's unemployment hovered around 2.5 percent (not seasonally adjusted), then spiked at 6 percent last March, sunk close to 3.6 percent in July, and started its steep climb to December's 8.7 percent.

Montana's seasonally adjusted rate in December was 5.4 percent.

December put Flathead in league with Glacier County's 9.2 percent rate, Lincoln County's 12.8 percent and Sanders County's 13.9 percent. It's almost unheard of, Davis said, to have these low-industry counties as peers in unemployment with Flathead County.

"It's bizarre," he admitted. "I think it's from the cascading effect of losing our best jobs here."

The number of unemployment claims almost doubled from 2007 to 2008 - from just under 6,500 to nearly 12,800.

Merchants didn't get as much for their goods, either. Even excluding the dramatic drop in energy costs and food, prices in general trended downward after last September.

"How do you put a price on anything when no one's willing to buy? That's the mindset we're in," Davis said.

But energy and food prices are on their way back up in the midst of a recession, setting up the perfect storm for a stalled economy. And, Davis warned, "there's no cure for stagflation."

Davis put in calls to the Flathead's top 20 employers in January, asking for employment numbers. He found eight with a downward employment trend, nine that were steady and three heading upward. The top 20 represent a broad swath of the Flathead.

The recent loss of 615 manufacturing jobs jeopardize 1,428 other jobs here, Davis said - 158 in health and social services alone.

They also will take a chunk out of sales - $484 million directly and another $228 million indirectly. And the loss of labor income alone amounts to $79 million directly, with another $62 million indirect effect.

All that cycles back to "how wealthy do I feel?" Davis said.

For every dollar increase in wealth - the value of homes and stocks, savings, disposable income - people spend 4 to 5 cents more. They spend that much less when it drops a dollar.

During the decade ending in 2000 when the average household's real net worth went up 5.3 percent a year, savings dropped to 2 percent of disposable income.

"People ramped up their spending beyond real means," he said. "Their real net worth was up only 20 percent." It came to a screeching halt in the past year, with $52 million less spending as a result.

It's bad for the slowdown but good for a future recovery.

When that recovery comes, Davis said, the Flathead should fare well. It has a well-diversified economy, educated labor force, community college for job training, gorgeous scenery, and a retail trade center that attracts other retail interests to this valley.

As the global economy rebounds, natural resources here will help the Flathead capture benefits. The federal recovery stimulus package still is an unknown, but low interest rates are a boon and entrepreneurs are bound to take advantage of, and feed into, a rebounding market.

"The Flathead," Davis added his encouragement, "is well-poised for recovery."