Untold megabytes have been consumed in the last few days discussing the results of some particularly dour surveys of Americans’ outlook for the U.S. economy.
To name a few examples, our colleague Joe Weisenthal asked this morning whether the economy can recover when most people believe the U.S. system is ‘fundamentally broken and not working‘.
Felix Salmon at Reuters worries that if the vast majority of people are truly so negative about the economy, then their view will become a self-fulfilling prophecy:
“Because on the strength of these answers, the double dip is coming. And it’s going to be a nasty one, too: 77 per cent of Americans think it’s going to be at least as bad as the current recession.”
Thing is, when most people are reported as being extremely negative, your contrarian alarms should be going off as an investor. Don’t respect the crowd’s view. It was wrong ahead of the recent crisis, was wrong during the dot-com bubble, was wrong during the roaring 20’s, and yes was wrong even during the worst of the Great Depression.
Also, notions that the economy is merely a product of people’s belief in growth or contraction forget what really drives economic growth — productivity gains, not smiling faces. If pessimism were enough to kill an economy, then the French would be in permanent recession.
Look, Americans are being put through the grinder right now. They’re being forced to re-skill themselves, refocus their spending on what they really need, and get creative. It’s a painful process and it’s understandable that it creates negativity. People are struggling.
Yet as a result of this struggle, American GDP is already approaching its pre-crisis peak, but with a far smaller active workforce, which means a lot of productivity gains have already been realised. As the unemployed find new productive endeavours, they will provide further upside to GDP, and this is happening slowly. Economic growth isn’t about happy Americans blowing money on luxuries, it’s about Americans becoming increasingly productive over time, as they have been doing this since the nation’s founding and have continued to do so during the current crisis.
So when reading these surveys remember that sentiment is sentiment. When everyone thinks the economy is free of problems, then you should be extremely worried. But when everyone thinks it’s broken, then take heart. Because that’s how things get fixed, and, when investing, it pays to read sentiment upside down.
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