WHAT MAKES A GOOD ECONOMY? EVIDENCE FROM PUBLIC OPINION SURVEYS

Analysis of 35 years of previously unstudied survey data shows how the American public evaluates the health of the macroeconomy. Survey responses are multidimensional, distinct from indexes of "consumer sentiment," and based mostly on genuine perceptions of economic conditions, not media reports of economic statistics. As such, they contain unique information about current and future values of these statistics, particularly consumption growth, a longstanding focus of the literature. Both "intangibles " and macroeconomic fundamentals explain substantial variation in the survey data; the public equates 2 to 5 percentage points of inflation with 1 percentage point of unemployment. (JEL E32, E27, EO1) I. INTRODUCTION Traditional business cycle measurement and theory tends to downplay the role of public perceptions. The health of the macroeconomy is evaluated, with a lag, through formal measurement of fundamentals like gross domestic product (GDP) growth, rather than by the opinion of the public. The objective functions employed by models of macro policy, derived from theory or prescribed ad-hoc, are similarly unshaped by public opinion on the attractiveness of various states of the economy. For a profession that is enamored of consumer sovereignty and cognizant of the value of idiosyncratic, decentralized information, this is a little surprising. It probably reflects, in part, a lack of available data. In the United States, prior research on the macroeconomic perceptions of the public has almost exclusively employed the widely available Michigan Index of Consumer Sentiment or its counterpart from the Conference Board, the Consumer Confidence Index, to predict future consumption. But these measures are not intended to be, and have not been interpreted as, general assessments of the national macroeconomy. They combine responses to a variety of questions, about personal finances and the macroeconomy, about employment, consumption, and profitability, about current conditions and the change in those conditions. These questions are sufficiently disparate that it is unclear what, exactly, either index measures or how it should be interpreted (see Merkle, Langer, and Sussman 2004). This ambiguity has probably contributed to a decades-long debate over the usefulness of such indices, which has been compounded by divergent findings on their ability to forecast future consumption (see Golinelli and Parigi 2004; Manski 2004). To surmount these data limitations, 35 years of responses were assembled from three reputable, national U.S. polls that ask about the current state of the national economy and/or whether economic conditions are getting better or worse. All are conceptually and (we show) statistically distinct from indexes of consumer sentiment, and none has been previously studied. As shown in this article, these poll data enrich our understanding of the business cycle in three ways. They contain information about fundamental macroeconomic variables, which are reported with a lag and (often) subsequently revised. They establish the role of various macroeconomic fundamentals (and of intangibles) in determining the public's satisfaction with the economy, which informs policy and suggests simple summary measures of economic conditions. And they reveal the multifaceted nature of consumers' macroeconomic perceptions, which span four dimensions across a total of nine survey questions. Section II introduces these surveys and shows how they relate to each other and to the Michigan and Conference Board indices. In Section III, we examine how macroeconomic conditions influence the assessments reported therein; their predictive power is examined in Section IV. Section V concludes. II. POLLING ON THE STATE OF THE ECONOMY For decades, American news organizations have asked respondents to assess the national macroeconomy; Table 1 lists the questions, time spans, sample periods, and response options for each. …