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Caddell, Patrick, (12/76-1/77)
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1976 Campaign Transition File
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Caddell, Patrick, [12/76-1/77]
Folder Citation: Collection: Office of Staff Secretary; Series: 1976 Campaign Transition File;
Folder: Caddell, Patrick, [12/76-1/77]; Container 1
To See Complete Finding Aid:
http://www.jimmycarterlibrary.gov/library/findingaids/Staff_Secretary.pdf
C
MEMORANDUM
TO:
Governor Carter, Bert Lance
FROM: Pat Caddell
RE:
Consumer confidence
DATE: 20 December 1976
In most economic thinking - and in most of the models
and projects that we will have to deal with in the next
four years - the consumer is treated as some kind of mythical
"rational" maximizer. Unfortunately, the real consumer does
not even approximate this ideal. He may maximize, but he
is just as inclined to maximize various psychological benefits
as he is to achieve some perfect economic formula. In many
cases the consumer's logic runs contrary to the economist's
logic. He cuts spending where he rationally ought to increase -
he's done the reverse as well. Even worse, from a "scientific"
point of view, the consumer changes. Political and economic
changes change the way he reacts to events and to government
policy.
However, the aggregate behavior of consumers is one of
the controlling forces in any economic strategy. Without the
ELECTROSTATIC REPRODUCTION MADE FOR
PRESERVATION PURPOSES
Memorandum to Governor Carter & Bert Lance
20 December 1976, Page Two
participation of consumers - both as workers and as wage-earners -
any strategy to change the business climate or the national
income is futile. At the heart of any view of the consumer is
consumer confidence - the basic outlook consumers have on the
economy and their economic expectations for the near future.
This memo seeks to examine three major points:
(1) the history of consumer confidence - where it's
been in the recent past,
(2) a theory of how it functions, and
(3) the implications of all this for planning.
Looking first at the recent history, we see that since
the early 1960's political and economic "shocks" have changed
the attitudes of Americans toward both the government and the
economic system. Of course, the consumer does not make neat
separations of economic, political, and cultural changes.
He tends to view them as unified and :somewhat related pheno-
mena. Most changes in both the economic and political sphere
can be reduced to four major attitudinal changes:
(1) There has been a decline in long-term expectations
for the country, people no longer expect the future
to be automatically "better".
(2) Watergate and the War in Vietnam reduced confidence
in the established institutions.
(3) Cultural changes produced changes in lifestyle that
affect consumer behavior - new concerns over health
and the environment had particular impact, and finally
Memorandum to Governor Carter & Bert Lance
20 December 1976, Page Three
(4) Double-digit inflation created both a new sensitivity
and a new fear for Americans.
1. Change in long-term attitudes
One of the results of the set of national disasters -
the war, assassination, urban riots, Watergate, and
economic problems - has been a change in the basic frame-
work of attitudes as well - attitudes toward specific problems.
From the survey data that is available, we find that in the
past a single political crisis or economic slump had little
long-term impact on the views of people about the long-term
future of the country. Americans were almost always optimistic;
they believed that conditions today wre better than in the
past and that conditions in the future would be even better.
Temporary crises might exist but the future was secure. Part
of this psychological overview was supported by tenets Ameri-
cans hold dear:
(1) Americans fight only just wars and never lose a war
(2) American Presidents, while not always bright, tried
their best; that the office was one of moral leader-
ship; and that "the office makes the man"
(3) Assassinations were a way of life in other places
but America was a land of the ballot not the bullet
(4) We had an abundance of cheap natural resources
Memorandum to Governor Carter & Bert Lance
20 December 1976, Page Four
(5) We had learned how to master the economy,
there would not be serious economic bad times
again; if there were problems, economists would
fix them; and finally it was impossible to have
massive inflation and massive unemployment at
the same time.
Each of these basic tenets was overturned, resulting
in unmatched pessimism. People no longer concerned them-
selves solely with small immediate problems, they now ques-
tioned the possibility of long-term success. The positive
environment that had framed all issues and problems was
shattered.
Table I shows the mean scores obtained from "ladder
scale" measures which ask a respondent to place the country
on the 0 to 10 scale - from best to worst - for five years
ago, today, and five years from now.
TABLE 1
National Ladder Scales
1959
1964
1971
1974
1975
1976
Past
6.5
6.1
6.2
5.9
6.1
5.6
Present
6.7
6.5
5.4
4.5
4.6
4.9
.7
8
1.0
Future
7.4
7.7
6.2
5.7
-
5.6
5.8
Memorandum to Governor Carter & Bert Lance
20 December 1976, Page Five
As we can see, in 1959, even after the 1958 recession, and
in 1964, people saw the present better than the past and expected
a still better tomorrow. In 1970 that changed. People found the
present worse than the past (bringing the rise of the nostalgia
movement) and expected little of the future. By 1974 and 1975,
the "present" had fallen to incredibly low levels and the future
was now expected to be worse than the past. By 1976, perceptions
of the past had declined, making the future "better," but at
levels far below those of past surveys. This change in basic
attitudes, coupled with some others, made the rise of an unknown
former Southern Governor to the Presidency possible. It also
undermined the "normal" reactions of consumers to the economy.
Memorandum to Governor Carter & Bert Lance
20 December 1976, Page Six
2. Decline of confidence in institutions
Over the course of these years there were steady declines in
public confidence in governmental, social, business, military and
religious institutions. A feeling of alienation increased to record
levels and the public questioned the efficacy of political
participation. Majorities came to feel that "politicians don't
really care about people like you", while a quarter did so in the
mid-1960's. By 1976, 69% of the people would agree "over the past
ten years America's leaders have consistently lied to American
people". While in the late 60's, majorities felt the government
was run for the good of the average person, by the early 1970's,
majorities disagreed. All of these attitudes and many more con-
tributed to a belief that the government could not be relied upon.
In the economic area, these attitudes eroded the government's
ability to "lead" the public on economic issues; the public became
steadily more skeptical of policy pronouncements, Where in the
past, the government could lead the consumer by discussion and
argument, by the 1970's the consumer would not even listen.
This combination of pessimisism and disaffection directly contributed
to making consumers more cautious and economically defensive.
Rebuilding confidence was hampered by the negative environment.
Memorandum to Governor Carter & Bert Lance
20 December 1976, Page 7
3. Lifestyle changes
The 1970's also saw changes in lifestyle. The generation
of the "baby boom" grew up, and their surge into the adult
population changed lifestyle views. Durable goods and cars,
which had been "luxuries" became necessities. Oddly, this reduced
the premium on comparative acquisition, i.e. a refrigerator was a
refrigerator and the impetus to buy was predicted on the need
for one rather than "keeping in style". The autos suffered
somewhat as the young and the well-to-do deserted American cars for
foreign imports -- in part due to efficiency/cost arguments,
in part because of the social maxim "small is good, big is bad",
in part due to the new "status" attached to foreign imports. Among
many young upscale consumers a new ethic arose favoring downscale
purchases of durables, autos and even housing and upscale purchases
of leisure and entertainment. In addition, inflation pushed all
consumers away from longterm planning of purchases to immediate
gratification, trading the future for today.
In addition, we see women entering the job market in massive
numbers. The new views of women not only liberated work, it
liberated political and social thinking as well. The rise of the
"growth versus no growth/less growth" issue can be traced to
primarily women and to young people. The "quality of life"
versus the "quantity of life" has produced a less traditional view
of the world among large sectors of society which influences not
Memorandum to Governor Carter & Bert Lance
20 December 1976, Page 8
only growth/environment issues, but energy attitudes, political
attitudes and most important economic and consumption attitudes.
These changes in values, altered the behavior of consumers and
the structure of individual economic decision-making.
4. Impact of double digit inflation
No factor had a greater impact on consumer confidence than
double-digit inflation. Except for occasional flurries in the
distant past, Americans simply had never experienced sustained
high levels of inflation. The impact was profound.
As consumers experienced inflation, coped with it and were
battered again, the reactions constantly changed. As inflation
continued, coupled with a serious recession, the initial public
reaction underwent alteration. The period 1973-1976 can be viewed
as a period in which the consumers struggled to adapt to inflation
and in the process the nature of consumer confidence, already effected
by the other factors discussed above, began to change as well.
During this period the failure of government policies in
addition to the misleading and often outright lying by government
officials forced the consumer to depend on his own instincts and
his personal reading of economic signals to determine an individual
economic response.
Memorandum to Governor Carter & Bert Lance
20 December 1976, Page 9
One has to consider the distance from Nixon's wage and
price controls in the face of "intolerable" 6% inflation and 6%
unemployment, to understand the extent of the most recent
economic recession. The responses of consumers would forever
be different. As our research proved in Spring 1975, recovery
would not be led by housing as had almost all past recoveries.
The criteria the consumers used for making judgements had changed
as had the judgement themselves.
For the consumer as for the voter, perception was reality
and the perception of runaway food inflation (often perceived
as 50% or more!) forced consumers to lower the standard of living --
particularly in the food area. They saw a future haunted by
an unseen energy that threatened their ability to plan for the
future. The consumer became more confused, apprehensive, and
cautious than at anytime since the Depression. Any economic scenario
that depended on a traditional consumer involvement in a recovery
was bound to be off base.
As inflation continued to haunt the consumer the result by
late 1975 was for the introduction of fairly massive inflation
psychology. Even in 1976 and early 1975 most consumers resisted
European-style inflation psychology reacting with the traditionally
conservative American fashion of saving money because of "bad"
economic news - whether inflation or unemployment. Following
the inflation sprint in July-August, 1975, the consumer finally
moved toward the European model and by late in the year and the
first part of 1976 the U.S. had experienced the broad impact of
Memorandum to Governor Carter & Bert Lance
20 December 1976, Page 10
inflation psychology. With it came the growing belief by
almost half the country that it was no longer worth planning
family purchases and indeed there began a movement away from
long-term purchases.
Memorandum to Governor Carter & Burt Lance
20 December 1976, Page eleven
Theory of consumer confidence
Our approach to consumer confidence is to regard it as
a way of summarizing the generalized feeling that consumers
have about the health of the economy and their own personal
future in it. Each consumer is given a great mass of data
each day about the economy. To be charitable most of that
data can be described as imperfect. Furthermore, the consumer
has neither the time nor the skills to do any kind of scientific
analysis of all the facts that are available.
Yet to make economic decisions, the consumer needs some
generalized sense of how the economy is working. We measure that
sense with four questions: satisfaction with income (how are
you doing?), comparison to a year ago (are you doing better or
worse?), expectations for next year (will you be doing better
or worse?), and finally, view of the economy (how is business
doing?). It can be shown empirically that a scale based on
these four questions correlates strongly to such things as
objective economic status and to purchase intentions.
On another level of analysis we sought to determine
what clues, which pieces of data, the consumer uses to get
the answers to those four questions. In the end, after a great
deal of searching we found that the strongest correlations at the
current time are to prices, and particularly to food prices. A
wide spectrum of clues are used - unemployment rates, prices
in general, interest rates and so on - but food prices are the
strongest correlate. It also is important to realize that the
Memorandum to Governor Carter & Burt Lance
20 December 1976, Page Twelve
consumer is far more sensitive to price change for
small, frequently purchased items like food and gasoline
than for larger less frequently purchased items such as
durables. For the consumer it is the small items that are
purchased which signal inflation, not large macroeconomic
figures. Subsequent analysis has shown that people are
even sensitive to the rate of inflation. People who see
prices going up slowly are more confident than those who
see prices going up quickly.
One problem that we have faced is that inflation pro-
duces declines in confidence - which should produce declines
in purchase intentions. However, inflation also produces
increases in inflation psychology - which should produce
increases in purchase intentions. This essential conflict
is one of the prime things we are continuing to try to unravel
in our on-going research. At the moment it appears that
when consumers meet cross pressures from these different
motives they pull back; caution is the watchword in almost
every situation. However, in late 1975-early 1976 and
perhaps in 1973 we saw periods where the inflation psychology
motivation caused rising purchases coupled with falling or
stagnant levels of confidence.
Given the complexity of consumer reactions, however, it
is vital to understand them before one glibly talks about
"stimulating" them. They are quite capable in their reactions
LU GOVERNOL Carter & Bert Lance
20 December 1976, Page Thirteen
of doing the opposite of what is predicted by "hard" economic
theory. The goal of any economic program at this stage must
be to increase confidence without creating the inflationary
fears that will cause consumers to pull back. One obvious
places to do this is at the point where consumers get their
information - the market basket.
Memorandum to Governor Carter & Bert Lance
20 December 1976, Page Fourteen
Few would argue that consumer confidence - how the consumer
interacts with the economy - should be an important area of
study. Yet in most economic analysis and forecasting the study
of consumer confidence has been neglected. It is often relegated
to a footnote in economic projections. In additon, consumer
confidence has often simply been treated as an "index", as a
number. Economists have shown little inclination to understand
the composition of consumer confidence, how it changes, the
impact of events on it, the signals that trigger response, or
the changing responses consumers give to those signals.
Yet consumers have been better at predicting the general
movement of the economy than many professional economic seers.
When we study the analyses from our various Cambridge Reports,
we find time and time again the aggregate perceptions and
concerns about the economy were borne out remarkably well by
events. *
Two points in time demonstrate this well.
(1) In the spring of 1975 there was a lot of talk about
a "recovery", particularly in light of the tax rebate.
However, consumer analysis indicated three points:
(a) a tax rebate was going to be primarily used
to rebuild depleted savings (b) the mini-recovery
which was going on was primarily caused by a percep-
tion of consumers that inflation - primarily food
* The Cambridge Report is a quarterly national survey which
interviews 1500-2000 respondents for two and a half hours on
subjects of attitude structure, economic plans and intentions,
social, cultural, and political attitudes. Understanding the
interrelation of these areas is the goal of the analysis.
Memorandum to Governor Carter & Burt Lance
20 December 1976, Page Fifteen
prices - was holding steady or declining (c) consumers
were quite cautious - because recent past experience
had been so bitter - that until there were sure signs
that inflation would abate, purchases of durables and
large items would be slow.
In short, the improved spirits in the spring of
1976 were not an indication of a full recovery. They
were only a sign that if the news about inflation were
better, a slow arduous recovery might take place.
(2) In late 1975-early 1976 we saw consumer confidence
level off with a slight decline, yet purchase inten-
tions skyrocketed. This historical occurrence was
explained by inflation psychology. We joined consumer
confidence with inflation psychology to produce a
"buying power index" which partially explained the
phenomenon. In addition, we found that unconfident
consumers were likely to purchase at almost the same
levels as confident consumers - also unusually. The
data suggested that unconfident consumers might well
spend themselves into a degree of confidence, less
"real" confidence than "inflation-driven" confidence.
This was reflected in the first quarter findings
which found confidence and spending intentions to
have increased. Yet there were signs that did not
mean a full-blown consumer recovery. As the Cambridge
Report stated at the time:
Memorandum to Governor Carter & Bert Lance
20 December 1976, Page Sixteen
"Yet there are some disturbing signs. Confidence
may be spreading across the country, but we're defin-
itely not in the midst of an epidemic; it still hasn't
infected the majority of Americans. Although economists
have no doubt that recovery is in full swing, the
majority of Americans still aren't convinced that the
worst times are behind us. Fear of inflation is strong,
and we're already getting signals of a new round of price
increases. If inflation psychology gets additional impetus
from rising food and fuel prices, it may boomerang and
push consumers back into pessimism."
I think that this analysis of consumer sentiment
proved clearly more accurate as a gauge to the economic
situation in 1976 than were the massive number of
economists predicting a strong recovery or even "boom".
Memorandum to Governor Carter & Bert Lance
20 December 1976, Page Seventeen
A brief history
Five major points in time stand out in the recent economic
history. Understanding their impact and their relationship to
each other helps to understand both the course of the overall
economy and some of the forces that are at play today.
The first major point was Richard Nixon's imposition of wage
and price controls in 1971. Despite the irony that is now
apparent in calling 6% inflation a "crisis" level problem, the
initial imposition of wage and price controls was greeted very
favorably. Consumers still believed that the government could
make positive improvements in the economy and they had faith that
the program would work. Confidence rebounded strongly in 1972
as did consumer purchases.
At the second point, in 1973, a number of forces came together
to begin the process of shattering both consumer confidence and
confidence in the government. Controls ended and inflation took
off. Watergate began the process of demolishing a President. Con-
sumer confidence plummetted. Oddly enough, though, purchase levels
remained fairly high. In retrospect it is apparent from the
survey data that one reason purchase intentions did not respond
to the decline in confidence was a slight increase in inflation
psychology -- anticipatory spending based on the idea that things
are only going to get more expensive. On the other hand, it is also
clear that consumer confidence was probably driven to artificially
low levels by the Watergate syndrome.
Memorandum to Governor Carter and Bert Lance
20 December 1976, Page Eighteen
Much of the decline in confidence was "political" rather than
"economic". Consumer confidence was discounted by many, and
indepth analysis, which indicated the confusion inflation was
precipitating was ignored.
At the third point, in 1974 and early 1975, we come to a
series of key events. The increase in oil prices has further
weakened public confidence and we are entering the period of truly
double-digit price increases. The public finds itself in the
midst of both high inflation and recession -- something that was
supposed to be impossible. By late 1974 it became apparent that
food prices were emerging as the key signal for consumer judgment
and that in a long-term sense consumers were beginning to question
their own long-term success.
In reaction to the tax cut, the public -- still fearing the
worst -- did more spending. They had learned to be cautious --
perhaps overly cautious. In the spring of 75, a decline in food
prices produced a temporary rebound of confidence. Consumers saw
some positive evidence that things might get better. However, it
was clear that without sustained good news at the cash register
and the gas pump that large increased purchases reflecting sustained
confidence were not likely.
Memorandum to Governor Carter & Bert Lance
20 December 1976, Page Nineteen
This leads us to the fourth -- and perhaps most important
turning point. In the summer of 1975, inflation bounced back to
double-digit rates after consumers had, for several months, been lulled
into feeling improvement was on the way. Our own research went
wrong for a while at this point. For over a year we had been
searching for signs of widespread inflation psychology or a
growth of this sentiment. We hadn't been able to find it and we
doubted that this would be the course undertaken by consumers.
When consumers had gotten their hopes up and then had them dashed
their was a momentary increase in inflation psychology which we
discounted at the time. Subsequent surveys, however, have shown
that from that moment the level of inflation psychology had doubled
apparently. It seems that it was this unexpected recurrence even
temporarily of double-digit inflation that finally brought the con-
sumer to a new significant set of responses.
This brings us to late 1976 and early 1976 - a period where
the consumer strikes back. We can sum up the results in four
major points:
(1) Inflation psychology becomes operational as a
motivation for making purchases. We were moved
to try to creat a "buying power" scale which
unites the buying motivations of inflation
psychology and consumer confidence in predicting
total purchase patterns. The nature of inflation
psychology combined with consumer confidence
is to sometimes drive purchases up and other times
Memorandum to Governor Carter & Bert Lance
20 December 1976, Page Twenty
drive it down.
(2) In the last quarter of 1975 and the first quarter
of 1976, despite declines in confidence, purchases
move up - fueled by inflation psychology. Histor-
ically it is unheard of for purchases to move up
while confidence declines. In fact we found the
unusual circumstance that people who were unconfident
were purchasing at the same level as those who
were confident. We theorized that "unconfident"
dollars might impact to build a surge of confidence.
(3) For a time, price increases were moderate. We find
in the first quarter that there is a decline in the
percentage of people who see food prices rising.
Also, a decline in the perceived rate of inflation
takes place. These factors and the inflation spending
prompt a rise of consumer confidence in the first
quarter although as the year before there are no
signs that the recovery will continue upward unless
"real" confidence as opposed to "inflation inspired"
confidence takes hold; that is inflation is perceived
to have been checked. In short it appears that a
real sustained surge in confidence and thus purchasing
would depend on a long-term resolution of the doubt and
and fears of the past few years.
Memorandum to Governor Carter & Bert Lance
20 December 1976, Page Twenty-one
(4) By the end of the second quarter it was clear
that confidence was not rising at any sustained
rate. In some areas purchasing intentions
leveled off and in others declined. Consumers
get conflicting and contradictory data at the
price front and from the news. The result was
caution and stability. Consumers who saw the rate
of inflation decreasing became more confident
and increased purchases. Those who saw the rate
rising became less confident and lessened pur-
chases. The outlook, despite much general economic
expectation, was for a leveling movement or even
a decline in purchasing.
An appendix containing excerpts from various analyses
prepared over the past few years which elaborates on this
history of consumer attitudes has been attached. I have
thought that these actual excerpts unvarnished by hindsight
provide a summary explanation over time, and I think bring
further understanding to the consumer confidence problem
as well as some insight into the relative predictive power
of in-depth consumer analysis.
Memorandum to Governor Carter & Bert Lance
20 December 1976, Page Twenty-two
The present situation
Right now we are on a plateau. For the last three
quarters, we have seen consumer confidence basically stag-
nate. Consumers are no longer certain where the economy
is going amidst the conflicting signals that they are get-
ting from the economy.
Yet there is some reason to believe that there is con-
siderable slack in the current situation - that a great
number of consumers are poised on the brink of purchasing.
For one thing, actual purchase intentions turned downward in
August, while many consumers actually became a little confident.
Our buying power index has actually increased slightly in the
past quarter - which should be a sign that intentions are moving
up. Consumers should be perceiving the further declines in
the inflation rate, particularly for food, that have just
been reported. The percentages of Americans who feel that
now is a good time to buy various things - houses, autos and
durables - has been at a relative high for the last two years,
though it is well below some historical levels. The tables
are shown below.
Memorandum to Governor Carter & Bert Lance
20 December 1976, Page Twenty-three
Do you think now is a good
Good time
Not sure
Bad time
time to buy a house?
R8 --- 1976 III
34%
14
51
R7- - 1976 II
35%
15
51
R6 - 1976 I
30%
16
54
R5 - 1975 IV
23%
14
63
R4 - - 1975 III
24%
15
60
R3 - 1975 II
26%
11
63
R2 - 1975 I
12%
6
82
R1 - 1974 IV
20%
8
72
#1972
51%
22
27
Generally speaking, do you
Good time
Not sure
Bad time
think now is a good time, or a
R8 - 1976 III
37%
18
44
bad time to buy a car?
R7 - 1976 II
36%
19
45
R6 - 1976 I
29%
19
52
R5 - 1975 IV
29%
16
56
R4 - 1975 III
23%
16
61
1972
46
29
25
Generally speaking, do you think
Good time
Not sure
Bad time
now is a good time to buy any
R8 - 1976 III
large household items?
38%
22
40
R7- 1976 II
40%
25
36
R6 - 1976 I
36%
25
39
R5 - 1975 IV
30%
25
48
R4 - - 1975 III
27%
22
51
R3 - 1975 Il
28%
18
54.
R2 - 1975 I
17%
12
71
RI - 1974 IV
33%
16
51
#1072
57
33
10
*Peak of highest consumer confidence rating since 1970.
Governor Carter & Beit Lance
20 December 1976, Page Twenty-four
It is likely that consumers might be poised on the edge
of confidence and an increase in purchases might be attained
with relatively less "push" than might be needed in some
other times. However, achieving anything at all will require
two things:
(1) Some additional reassurance on the price front.
While we have not presented figures, research
Think
on the point shows most consumers that prices
are still going up;indeed, the third quarter shows
perceptions have gotten worse than they were in
the second quarter. Fear of inflation causes
consumers to pull back from spending.
(2) Some stimulus to convince consumers that things
are moving.
There is evidence in other surveys - the Sindlinger
work - that there was in fact a post-election jump in confi-
dence. Our own post-election work, a fuller analysis of
which will be ready in several weeks - shows signs that nearly
two-thirds of the voters feel a Carter victory will be good
for the economy and a plurality of those with an opinion feel
Carter will improve their own situation. The Sindlinger figures
did stop rising at the "steel" crisis, but they remain higher
than in the post-election period. Indeed, it can be speculated
that the uncertainty surrounding the election may itself have
prolonged the failure of positive perceptions to translate
themselves into purchase intentions or real purchases.
Memorandum to Governor Carter & Bert Lance
20 December 1976, Page Twenty-five
Given the fact that so many consumers seem poised on
the verge of purchasing, it might very well be the short
sharp stimulus such as a rebate that would be more stimulative
than a longer term tax-cut. The rhetoric of a rebate also
lends itself to the "fighting inflation" theme since one can
always say that the reason for not having a permanent tax-
cut is because one wants to keep in sight the goal of balancing
the budget.
Memorandum to Governor Carter & Bert Lance
20 December 1976, Page Twenty-six
A few additional points
(1) Seasonal adjustment and other government data problems -
There seem to be serious problems with the seasonally adjusted
figures. I had an extended conversation with the chief economist
and other analysts at Sears, Roebuck, several of whom are
advisors to the Census Bureau. They made a quite persuasive
case that there are serious problems in the calculation of the
seasonally adjusted figures when there have been sharp movements
up and down in the business cycle. Similar complaints are
being lodged in other circles as well, most notably by Professor
Modigliani, the outgoing President of the American Economics
Association. The largest area of criticism is over the unem-
ployment figures.
There appear to be other problems as well. The initial
monthly retail sales figures are consistently off from the
final figures. For example, for September the initial Retail
Sales Figures (RSF) says sales were increasing when in fact
they were decreasing. October's figures (RSF) indicated a
decline in sales when actually there was an increase. These
figures were corrected a month or so later, but the impact
had already taken place. The problem seems to be in the recovery
of the initial sample, only 70%, and in the composition of the
sample itself. In addition, the samples have other problems
as well. Many of the samples in retailing and consumer prices
are nearly fifteen years old. In men's clothing there are items no
longer being sold still in the sample! It appears that it is
Memorandum to Governor Carter & Bert Lance
20 December 1976, Page Twenty-seven
taking the Census Bureau anywhere from 8 to 15 years to
ready new samples for the Price Index, Retailing, etc!
There are important figures from the 1970 Census that have
still to be run. I have further looked into the problem and
I must say it seems rather incredible.
In the employment area some of the figures have
serious problems. The monthly U.S. Labor Department's
estimates of "real", spendable income underestimates by
35% to 40% actual earnings.* The figures in the annual
survey which comes out a year later steadily have shown
the descrepancies. The reason is that the monthly figures
are based on an assumption that the average worker who
supports a family of four has the same weekly earnings
as the average of all workers! Thus the average includes
people working part-time, people adding to family income,
etc. The Bureau of Labor Statistics admits the monthly
figures are wrong and footnotes every release, but noone
seems to take notice. Few outside the BLS have any sense there
are problems of this magnitude. The horror stories could
go on.
One point that does need to be made is that with the
tremendous increase of women working and employment at record
levels, the unemployment figures are masking several points.
For one, a person who works to supplement family income
when laid off is counted with the same weight as a single
family bread-winner that is laid off. Second, of course, are
the people who have given up looking for work and who are not
*From articles by Geoffrey H. Moore, Director of business cycle
researchat National Bureau of Economic Research and Senior
Research fellow at Stanford University.
Memorandum to Governor Carter & Bert Lance
20 December 1976, Page Twenty-eight
counted as unemployed. Another problem is workers who are
on SUB benefits and receive 95% of their weekly salaries -
they will often seek to be laid off temporarily for vacations
when things are slack. The problems flow back and forth with
regularity.
(2) Conference Board and Sindlinger - I have talked to Fabian
Linden at the Conference Board, who runs their Consumer Confidence
Index, and to Sindlinger. The Conference Board will have results
next week and will get them to me immediately. Sindlinger provided
me his weekly figures on confidence which are below.
June 20
55.5
Sept. 15
51.6
Recession level 64.0
Oct. 13
49.8
Oct. 27
49.0
Nov. 3
46.8
Nov. 10
49.7
Nov. 17
56.7
Nov. 24
58.0
Dec. 1
57.7
Dec. 8
57.3
Dec. 15
57.1
These figures confirm our own impressions that there was
a slight drop from September to early November, and a rise
after the election. Sindlinger says the rise stopped the day
CO Caller a Dell Lance
20 December 1976, Page Twenty-nine
after the steel announcement. He will provide new figures this
week. It also describes the seasonal adjustments as "malprac-
tice" and "sadistic" and has been arguing the point for a year,
he claims.
Memorandum to Governor Carter & Bert Lance
20 December 1976, Page Thirty
Notes on the appendix
As indicated these are actual excerpts from the summaries
of the Cambridge Report over the last seven quarters. Read
quarter-to-quarter I think they provide an understanding of
how the consumers moved over the lat two years as they attempted
to evaluate and react to economic situations. I would urge
a careful reading of the excerpts from Reports 4, 5, 6, and 7.
Below is an index to the reports:
Cambridge Report
Quarter
Survey taken
Historical point
A. Cambridge Report 2
1st, 1975
January, 1975
Lowpoint recession
B. Cambridge Report 3
2nd, 1975
April, 1975
Mini-recovery
C. Cambridge Report 4
3rd, 1975
August, 1975
Impact New Inflation
D. Cambridge Report 5
4th, 1975
November, 1975
Confidence down,
spending up
E. Cambridge Report 6
1st, 1976
February, 1976
Confidence rise -
inflation psychology
takes hold
F. Cambridge Report 7
2nd, 1976
May, 1976
Confidence levels
off, recovery to
stall
G. Cambridge Report 8
3rd, 1976
August, 1976
Recovery stalled
Appendix A
EXECUTIVE SUMMARY
Cambridge Report #2
FIRST QUARTER 1975 - January 1975
"Today, however, we see distinct signs that consumers are beginning to
lose faith not only in the prospects of the country and the economy but
in their own long-term well-being as well. Unemployment has joined
inflation as a major concern, but worries about inflation have not faded
at all. The number of consumers planning to buy everything has been cut
just about in half from the already depressed fall levels."
"This point becomes very significant when we look at potential government
moves to stimulate the economy, such as a tax cut. In Report 1, we
demonstrated that consumer confidence - or short-term economic expecta-
tions - is strongly related to what we labeled the "super market"
perception of inflation. Simply translated, this means that small
increases in items consumers buy frequently are psychologically more
important than large increase in items they rarely purchase. Supermarkets
have recognized this for a long time, and often sell "image" items -
bread, milk and meat - at or even below cost in order to create a "low
price" image for the store itself and thereby attract shoppers. Of
course, the difference is made up on thousands of infrequently purchased
items.
What we are arguing is that "image" items also play a large role in the
overall economy. Indeed, given our hypothesis about frequency of pur-
chase, image items for both the economy and the supermarket may be exactly
the same. As the analysis of Section 2 of this Report tries to show, the
consumer reaction to moves to stimulate the economy, such as a tax cut,
will be determined to some extent by whether or not the government can
restore confidence, not by public relations but by guaranteeing that the
prices of these image items are going to be stable or even decline. If
not, much of any tax cut or rebate will be saved or used to reduce debt.
While eventually the money will filter back through the economic system
into productive investment, the positive impact will be delayed."
Appendix B
EXECUTIVE SUMMARY
Cambridge Report #3
SECOND QUARTER 1975 - April 1975
"Throughout this Report, we will see what may seem like a baffling mix
of optimistic directions and pessimistic levels, Almost every measure in
the Report has recovered slightly from the lows we saw in the winter; but
at the same time, few figures have reached the levels of expectations we
saw in the fall. If one covers up the winter figures and looks only at
the absolute values of the spring response, it's clear that substantial
fear and pessimism remain. Thus, our survey seems to have found Americans
right on the threshhold as far as confidence in recovery is concerned.
One fundamental reason seems to underlie this uncertainty about recovery:
the signals people have been getting from the economy - primarily food
prices, though changes in unemployment and interest rates seem to have
some impact as well - are neither clear enough nor strong enough yet to
increase their confidence. Many have come to believe that business will
get better in the coming year; at the same time, a lesser number feel
that their own income will improve, and the past still looks better than
the present.
What all this adds up to is that although the people have seen some good
signs, they've also had some bad experiences. They are a little more
ready to spend and to buy than they were before, but they are still wary
of overcommitting themselves. They want to see prices and unemployment
start to decline before they will be convinced that the economy is, in
fact, headed for recovery. If they are disappointed in either - like
the proverbial groundhog who sees his shadow - they will surely slam
the door on recovery for several more months.'
Despite this shift in concerns, however, the figures - particularly those
in Section 6 of this Report (which presents the results of our first panel-
back survey) - seem clearly to show a stronger relationship between
perceptions of price changes and consumer confidence than between aware-
ness of unemployment and consumer confidence. This is only logical,
since inflation affects 100% of the people while unemployment affects
only the unemployed and, perhaps, those who worry about being unemployed -
a relatively small percentage of the population.
Furthermore, as we have hypothesized in earlier Reports, people seem to
be differentiating between food prices and other prices. At the time
of the survey, 41% of the people felt food prices were stable or falling
while "only" 57% felt they were rising. However, only 28% thought prices
in general were stable or falling while 69% saw them rising. What is even
more important is that despite the fact that food prices actually fell
over most of the country in the few months preceding this survey, slightly
over half the people still felt they were rising. And those who saw food
prices rising experienced a much larger decrease in confidence than those
who felt they were declining - 56% of the first group were less confident
than last winter versus only 31% of the second group.
The figures on perceptions of food prices actually represent a massive
improvement when stated in the reverse. For the first time in a long
while, nearly half the people felt food prices were either stable or
falling. However, even as the analysis for this Report was being finished,
government figures were released showing a modest upturn in food prices
in April. While many feel this was only a temporary aberration, given the
strong correlation that exists between food prices and consumer confidence,
Appendix B continued
EXECUTIVE SUMMARY
Cambridge Report #3
Page -2-
it could certainly help reverse the weak positive trends we've just begun
to see in our consumer confidence measures. And - since there is also
a clear relationship between changes in consumer confidence and changes
in purchase plans (see Section 6) - this negative impact would reverberate
throughout the economy.
At this point, it is important to note that although we've only looked at
food prices, the same conclusions would apply equally to gasoline prices.
As we have demonstrated starting with Report 1, small increases in the
prices of frequently purchased items have a greater impact on consumer
awareness - and on consumer confidence - than large increases in seldom
bought big-ticket items. And gasoline certainly fits into the first of
these categories."
Appendix C
EXECUTIVE SUMMARY
Cambridge Report #4
THIRD QUARTER 1975 - August 1975
"The cautious optimism that characterized the mood of the American people
three months ago is gone, replaced by a pervasive uncertainty that might
well be labelled "cautious pessimism". Thus, the data show that many
Americans feel they have made progress over the past quarter, reversing
three straight quarters of decline. (If is probably their readings
of this feeling that have mislead public opinion analysis who claim that
consumer confidence is still climbing.) However, the American people
anticipated this progress last spring. Now when they look ahead, they
expect little further improvement, either in their personal lives or in
overall business conditions. Furthermore, many Americans are finding
their disappointment a little hard to swallow."
"A close analysis of the data shows that the mood swing we seerin this
Report is related directly to people's perceptions of inflation -
particularly food and fuel inflation. Last spring, many Americans saw
food prices falling or stable, and some even saw prices in general
stabilizing. Over the summer, however, people quite correctly perceived
an upward turn in prices. This perception has dampened their confidence,
curtailed their spending, and fueled their anger.
This analysis only re-emphasizes one of the key conclusions that came
out of Report 3: the movement of prices is crucial to the course of the
economy. The failure of consumers to participate in the recovery could
make it no recovery at all. Tax cut dollars - this year's and, possibly,
next year's - can only spur a recovery if they are used to buy durable
goods or stimulate the economy in other ways. Yet consumers are weary
of price increases; they will do very little so long as the threat of
inflation hangs over their heads."
"In response to the questions we asked in early August on inflation, we
see almost total unanimity among consumers that the prices they were
paying were going up. Furthermore, when we asked respondents to estimate
the size of price increase, we found those estimates rising for the
first time in three quarters. In the spring, the average estimate was an
8% increase overall prices for the coming year; the August estimate was
more than 12%.
We also see evidence that consumers are beginning to give up hope of a
halt in inflation. Larger numbers than ever before agree with the state-
ment that we may have to learn to live with inflation because prices
will never be stable again. Does this mean that we will finally see the
emergence of a so-called European-style inflation psychology? Does it
mean a birth of anticipatory spending?
We think not. Everything we have seen in the last four surveys suggests
that Americans tend to react conservatively when they seen prices moving
up. Rather than spending to hedge against future prices that may be
even higher, they cut back their purchases to accumulate reserves against
future troubles that may be even worse."
Appendix D
EXECUTIVE SUMMARY
Cambridge Report #5
FOURTH QUARTER 1975 - November 1975
"In terms of general economic developments, Report 5 shows two almost
contradictory trends. Confidence has leveled off or fallen for most
consumers. More Americans than ever before feel that the year ahead
won't be much better than the one just past, and majorities of every
group in the population feel that the worst of the recession is right
now or still ahead of us. At the same time, however, the responses to
other questions we use to assess the mood of the American people seem
to show less panic.
For example, while consumers are unanimous in seeing prices for both
food and general commodities rising, they have lowered their estimates
of the rate. Moreover, a slightly higher proportion, though still a
minority, of Americans feel they are keeping up with inflation. The
tone of our respondents' "hopes and fears" about their personal lives
has also become less emotional; economic worries still predominate, but
fears of a "Great Depression," complete with soup lines, have been
replaced by more conventional worries about financial well-being.
Similarly, when we look at the reasons people give for saving money,
"economic security" - a more confident response - has edged ahead of
"emergencies," which was the dominant theme of the past year.
The most positive finding to emerge from the current survey was the in-
crease in consumers' purchase intentions. Although plans to buy housing
and automobiles remained basically stable over the last quarter of 1975,
intentions have risen for almost every category of durable goods. Pur-
chase intentions for clothing are also strong. The current levels don't
set any records, but they do indicate a basic recovery in consumer buying
from the recession lows.
Yet, despite all these positive signs, consumer confidence itself has
slipped slightly. The reason, which the panel analysis in Section 7 of
this Report makes clear, is persistent inflation. Even proceeding at a
more modest rate, inflation continues to sap confidence and make consumers
nervous. If this picture doesn't change, we - and all other consumer
researchers - will have no other choice but to re-evaluate the basic
assumptions underlying the whole concept of consumer confidence."
"Until now, two basic assumptions have provided the underpinnings for
most studies of consumer psychology. First, it was assumed that the
majority of people expected long-term "progress" for themselves and for
the economy. Second, consumers were believed to view economic problems
as - in the language of our ladder-scale categories - "temporary crises"
that could be solved. Thus, every economic development was perceived as
having a direction, and the times were either "good" or "bad." Simple-
minded as these assumptions may seem, they did have roots in empirical
reserach and they did reflect the most typical way of viewing the world.
It seems clear that the general notion of consumer confidence, which
reflects the "direction" in which consumers think their lives and the
nation are moving at any particular time, does help to explain the ebb and
flow of purchase plans as well as decisions on how much to save, to borrow
and to spend. On both the individual and the aggregate level, rising
confidence has been associated with increased plans for spending and
Appendix D continued
EXECUTIVE SUMMARY
Cambridge Report #5
Page -2-
other economic activity, while falling confidence has been linked to
reduced consumer spending and efforts to reduce debt and accumulate a
nest egg in the bank.
However, to reiterate a critical point that every Report, including
this one has made in one way or another, perceptions of price increases
- partiuclarly for frequently purchased items such as food and fuel -
have a far greater impact on consumer confidence levels than any other
economic indicator. The most decisive upturn we have seen in consumer
confidence (documented in Report 3) followed several months of actual
price stability and, because it was experienced at the cash register,
enormous consumer awareness of this stability. Since that time, there
have been periods when the key economic indicators have moved up fairly
strongly, but consumer response has lagged."
"It appears that many, if not most, consumers have chosen to watch in-
flation as their key economic indicator in the same way that the govern-
ment watches a host of indicators, leading, lagging or otherwise. Al-
though consumers may take other factors into account - news reports,
the unemployment rate, interest rates and so on - the data all point to
the primary importance of the experience at the supermarket and the
gasoline station.
While we can only speculate, a number of things may explain the consumers'
choice of inflation as their leading indicator. First of all, inflation
is easy to see and to understand. Even if you can't calculate percentages,
you know when the price of hamburger goes up. However, they may be
exaggerated, perceptions of inflation are highly reliable. Unlike news
pronouncements or political speeches, you know that what you're seeing
is the truth; you don't have to wonder whether someone lied to you or
you misunderstood."
"This theory about the way consumers view the economy - a theory that, in
our judgement, is fully supported by both reason and fact - leads to
troubling questions for both consumer researchers and those who have to
appeal to the American people as customers or as voters. The most
fundamental question is, quite simply, this: What are consumers going to
do if the relationship between general economic health and the inflation
rate breaks down? (This assumes, of course, that we can have economic
health with the 6% to 7% per year inflation many economists now predict
as "normal" for the next decade.) Will they, or can they, adopt an
alternative basis for making personal economic decisions?
Inflation psychology, for example, dictates a purchase strategy of buying
as much as possible as quickly as possible. If they truly come to accept
rising prices as a fact of life, Americans may simply abandon consumer
confidence and shift to a strategy based on these dictates. On the other
hand, a "steady-state" view of the economy - where the past, the present
and the future are essentially the same - might suggest a strategy that
places more emphasis on competition with other consumers for a bigger share
of the pie (since people can no longer rely on the economy to lift them up
with the general mass of consumers), and "bargin hunting" in the market-
place to stretch limited incomes as far as possible."
Appendix D continued
EXECUTIVE SUMMARY
Cambridge Report #5
Page -3-
"The picture need not necessarily be gloomy since the consequences of
individual economic action do not always produce the macro-economic
consequences the individuals themselves desire. We must not lose sight,
for example, of the very real increase in purchase intentions that has
taken place. While part of this increase can no doubt be attributed to
the growth of an inflation psychology; another part to the simple accep-
tance of the idea that things are not getting either better or worse;
and a much smaller part to increased consumer confidence - the resulting
purchases will have the same effect on the economy as "confident"
purchases would in terms of producing jobs and fueling industry. And, if
in turn, this increase economic activity produces more jobs and income
without sending prices skyrocketing again, a restoration of real confidence
may take place."
Appendix E
EXECUTIVE SUMMARY
Cambridge Report #6
FIRST QUARTER 1976 - February 1976
"This Report stands out from those that have gone before it because of
the new highs set by the key measures we use to understand the mood of
the American people. Consumers have become markedly more optimistic about
the health of the economy and the prospects for both their own and the
nation's well-being. In fact, the total number of confident consumers
is the highest we've found in any Cambridge Report survey, and the total
number of unconfident consumers the lowest.
Inflation psychology has taken an even bigger jump than consumer
confidence, and it, too, is at the highest level we've seen since the start
of The Cambridge Report program. Today, despite their experience of stable
or falling prices over the last quarter, nearly half the population
believes prices will never be stable again. This acceptance of inflation
has combined with consumer confidence to boost purchase plans for some
items - in particular, automobiles - to their highest level in over a
year, and sustain others at the same record level they set last quarter.
So, looking at the growing confidence of our respondents and the way they
plan to spend their money, it's hard to resist the conclusion that the
country is back on the track again. Yet there are some disturbing signs.
Confidence may be spreading across the country, but we're definitely not
in the midst of an epidemic; it still hasn't infected the majority of
Americans. Although economists have no doubt that recovery is in full
swing, the majority of Americans still aren't convinced that the worst
times are behind us. Fear of inflation is strong, and we're already get-
ting signals of a new round of price increases. If inflation psychology
gets additional impetus from rising food and fuel prices, it may boomerang
and push consumers back into pessimism.
In understanding the economy today, the history of the last few years is
of vital importance. The massive and unprecedented inflation of 1974
and 1975 set the stage for both a different kind of recession and a
different kind of recovery. And unless that point is understood, it is
hard to follow the developments of today. It is clear that complex inter-
actions exist between price changes and confidence, between price changes
and inflation psychology, and between both confidence and inflation
psychology and purchase plans. Inflation is contributed to an extra
decline in the economy during the recession as it scared consumers
away from spending. Now, as the recession ends, it is aiding the upturn
as more confident consumers are encouraged by inflation psychology into
additional spending, particularly for luxury-type goods. We can envision
several possible scenarios for the coming months. (1.) If prices remain
stable or falling in many sectors, as they were last quarter, confidence
should continue to increase and, sooner or later, inflation psychology
will abata. In this scenario the nation should experience a stable and
sustained economic recovery. (2.) On the other hand, a resumption of
rising prices could fuel inflation psychology and proportionately weaken
confidence. Rumblings from the farms already indicate higher food prices
are on the way; similar increases can be expected in industrial
commodities. If prices rise rapidly, consumer confidence could fall
dramatically. Our findings in this Report indicate that while inflation
psychology would continue to rise, it is not strong enough by itself to
keep purchase intentions up in the absence of wage increases that sustain
real income. Indeed, in times of falling confidence, inflation psychology
Appendix E continued
EXECUTIVE SUMMARY
Cambridge Report #6
Page -2-
may actually work against increase in purchase plans. Worried consumers
who see their standard of living falling may view inflation as just one
more bad sign, one more reason to pull back and save. (3.) A third
scenario, which exemplifies the last quarter, is also possible. Prices
resume their climb and inflation psychology marches onward. However, the
rise of prices is moderate and wage inflation cushions or negates any
impact on real income. The consumer thus finds inflation an unreliable
planning tool - as we saw in Report 5 - and remains confident until some
more decisive clue to the future of the economy appears. A marriage of
hope and fear continues to fuel economic progress for at least the rest
of the year."
"What is more interesting than the absolute level of purchase plans this
quarter are the patterns of these plans. In the case of automobiles, for
example, we are seeing a shift back to medium-size, American-made
vehicles. However, this is due less to any change in preferences than to
the fact that many middle-income, middle-aged Americans have reentered
the auto market after a year's absence. Similarly, the seeming shift
that we saw over the past year to smaller, imported cars was produced
largely because higher-income and younger consumers, who prefer such cars,
accounted for a disproportionate share of all auto purchases.
In the case of consumer durables, our buying power scale shows that
inflation psychology not only encourages both confident and unconfident
consumers to purchase more than they otherwise would, it also affects
the types of goods they purchase. Thus, confident consumers who believe
prices will never be stable again tend to make luxury purchases, such
as televisions, stereos and dishwashers. Unconfident people who have an
inflation psychology, on the other hand, are more inclined to make
investment-type purchases, such as clothes washers and dryers and
refrigerators."
Appendix F
EXECUTIVE SUMMARY
Cambridge Report #7
SECOND QUARTER 1976 - May 1976
"Three months ago, we found cause for considerable optimism in our
consumer confidence readings. People were clearly getting positive
signals from the economy. But at least part of our good feeling was
based not on the objective level of the figures but on the apparent
burst of enthusiasm they represented compared to the preceding quarter.
In this Report, we are confronted with the same objective data, and
thus, with little or not growth of confidence. Without such growth,
it is easier to look at the basic facts and see that the majority of
Americans still have doubts about the future of the economy and their
own well-being. The small decline in purchase plans for many consumers
goods this quarter reflects this ambivalence. People think the times
are right to buy, but they aren't sure enough to actually make plans.
In the midst of what has been termed by "hard" economists a strong
recovery, this is a disappointing picture. Consumer confidence is
stable - or stalled - at a level that looks good only in relation to the
worst economic times this country has experienced since the Great
Depression. And purchase plans, if they haven't actually softened,
certainly haven't firmed up.
Yet future stability isn't guaranteed by the current figures either. The
failure of consumer confidence and spending plans to increase this quarter
doesn't mean they won't decline next quarter. Significant groups of
consumers clearly expect their personal economic circumstances and bus-
iness conditions to get worse. In the past, there have been hints that
consumers might move toward a "steady state" view of the economy (an idea
we discussed in detail in Report 5), but this Report doesn't show
people expecting things to be stable so much as it indicates confusion on
the part of many consumers. It's one thing to say, "Things won't get
much better or worse, they' stay basically the same," and another to
say, "I can't tell whether things are getting better or worse."
We have noted before that for many, if not most, consumers, inflation
seemed to be the key indicator of the health of the economy. From past
experience, consumers knew that inflation and economic progress did not
go hand in hand. Today, however, this is exactly what is happening, and
at least for the time being, consumers have no reliable planning tool. The
response to a new question we asked this quarter shows that this inability
to plan is strongly related to consumer confidence - that is, those who
feel the most frustrated in their efforts to plan are the least confident.
To make matters more confusing, the inflation picture itself is hard for
consumers to decipher. Because of the important role inflation plays in
consumers' attitudes toward the economy, this quarter we explored the
question of whether consumers differentiate between the presence of
inflation and the rate of inflation. A series of questions demonstrates
that consumers are, in fact, very sensitive to the rate of inflation, and
furthermore, that there is a strong correlation not only between percep-
tions of inflation in general and consumer confidence, but also between
perceptions of the inflation rate and consumer confidence. Thus, more
people saw prices rising in the second quarter than the first, but most
of these people also gave lower estimates of the rate of price increases.
Appendix F continued
EXECUTIVE SUMMARY
Cambridge Report #7
Page -2-
And those who saw inflation slowing were far more confident than those
who saw it speeding up.
Our buying power index, which measures the combined impact of consumer
confidence and inflation psychology on spending plans, helps make
some sense out of this confusion. After continuing up last quarter, this
quarter it points slightly downward. Furthermore, the group of people
who are theoretically most inclined to purchase - people who are both
confident and inflation-oriented - has shrunk since the first quarter." "
Appendix G
EXECUTIVE SUMMARY
Cambridge Report #8
THIRD QUARTER 1976 - August 1976
"This Report documents the third straight quarter of sagging buying in-
tentions and relatively low expectations for the future. Our consumer
confidence index rose slightly, but any thought that a resurgance is
underway disappears when we look beneath the numbers at the actual
responses. Most Americans - a full two-thirds - don't think they are
any better off today than they were a year ago and don't expect next
year to be any better, either for themselves personally or for the
economy in general. Our long-term ladder scales show a paradoxical
kind of optimism. More people feel the future will be better than the
past, but this is because they have lowered their assessment of the past,
not because they have raised their expectations for the future. The future
looks better only in comparison to the past."
"Thus, consumers remain reluctant to engage in the kind of activities
that would get the economy moving again. This foot-dragging has been
noted by many observers. In the final days of the Presidential campaign,
part of the debate centered on how serious the "pause" in the recovery,
or the "consumer yawn," was and what steps were needed to counter it.
Commentaries ranged from near panic cries of imminent recession to
protestations that the "pause" was actually an improvement over the
frantic economic activity of the first quarter.
One point on which all the analysts seem to agree, however, is that the
failure of consumer spending to pick up reverberates throughout the
economy. Storeowners become more cautious; they may not buy as much for
the Christmas inventory or hire as much help. Factory managers, noting
lower orders, may not actually cut back, but they may delay the purchase
of new machinery. Machine tool firms
and
so
on.
An obvious lesson in economics need not be repeated at great length here.
The central message is clear: without more positive activity by consumers,
a certain sluggishness is sure to presist throughout the economy. The
danger of "yawning consumers" is that they will put the economy to sleep.
The essential questions, then, are: why are consumers hanging back, and
what can be done to change things?"
"The survey data offer explanations on both the objective and the subjec-
tive levels. Objectively, it seems clear that over the past few years con-
sumers have lost real income. Many consumers - particularly those in the
middle-income groups, who do a considerable amount of the total
purchasing - have less purchasing power today than they did 4 years ago;
the response to our standard question on satisfaction with current income
shows that they recognize this. Thus, one explanation for current con-
sumer behavior is that people simply don't have the money to make
purchases."
"Turning to the subjective factors underlying the "pause," it is clear
that a simple lack of funds cannot entirely explain the failure of consumers
to participate in the recovery. Americans hold substantial savings, credit
is available and not being used, and even higher-income people, with
clearly adequate incomes, have reduced their purchase intentions over the
course of the past few quarters. Other factors are clearly at work.
Appendix G continued
EXECUTIVE SUMMARY
Cambridge Report #8
Page -2-
Not surprisingly, we find this quarter that Americans are again picking
up negative signals from the economy. Right or wrong, they see all
four of their key indicators taking a turn for the worse. Two-thirds
see food prices moving up - though, in fact, food prices have been
relatively stable for the past few months. Three-quarters see prices
in general moving up - a correct perception. Whereas last quarter, a
plurality saw unemployment declining, today nearly half our respondents see
it increasing again - a very discouraging perception. Even for those
who have jobs, a rise in unemployment is a bad sign; they worry about
losing them. Finally, a plurality also see interest rates as increasing,
though, in fact, they've been relatively stable for the past few months.
So, two of the negative perceptions - interest rates and food prices -
are somewhat mistaken, but two others, prices in general and unemployment
reflect legitimate concerns about the economy."
C
MEMORANDUM
TO: Governor Carter
FROM: Pat Caddell
DATE: 21 December 1976
RE: Additions to December 10 Working Paper
Reviewing my working paper on politics, I found several
points that I wanted to address in more detail. The first is
the need for an inflation offensive, a short reference to which
is made on page 46. The second is the need for a vigorous
effort to visibly involve government, business, and consumers
in a dialogue on problems and solutions. This expands on the
"new accommodations" material on pages 39-40. Appendices
are attached on each point.
Two further points about the overall political situation
also need emphasis:
(1) Governor Carter's political situation is precarious
for a Democrat. Any loss that he sustains among
the nontraditional groups which supported him in
ELECTROSTATIC REPRODUCTION MADE FOR
1976 that is not compensated for among other groups
PRESERVATION PURPOSES
would put his political future in danger.
(2) The Democratic party is in serious national trouble -
with a shrinking and ill-defined coalition. We need
a new and broader political coalition that can attract
new support. It would be a mistake, however, to try
Memorandum to Governor Carter
21 December 1976, page two
to create an all-inclusive coalition. Indeed,
one decision that must be made is which groups
ought not to participate in the coalition. A
decision on who to exclude will make clearer both
who should participate and how - strategy should
be formed.
Let me reemphasize that those serving in the Administra-
tion, at all appointed levels, must be educated to Governor
Carter's philosophy and to the political realities that exist.
We cannot have a situation where substantive experts deal
in.a political vacuum. If the Administration is to be success-
ful, all its officials need to have a working understanding
of Governor Carter's goals and his philosophy. Also, they
must be made sensitive to the implicit contract made during
the campaign between the Governor and the electorate. Finally,
they must realize both the grounds upon which public approval
will be won or lost and the strategy for ensuring a positive
result.
-57-
Appendix I - The need for an inflation offensive
As mentioned in the working paper, the current low level
of consumer confidence results from a fear of inflation.
Double-digit inflation has deeply scarred the American con-
sumer. As the concurrent memo being prepared on consumer
confidence will show, it is not the general rate of inflation
that disturbs the consumer as much as the inflation in his
or her household budget - the money that goes for food, gasoline,
health care, housing, and taxes. The economic signal to which
the consumer responds most is food costs, followed by gasoline
costs, price increases for health, housing, taxes, and finally
unemployment and interest rates. And for three-quarters of the
population 70% of their purchases are in these four areas. If
consumer confidence is to rise - thus increasing consumer
spending - then fears of inflation must be alleviated.
I think it is possible to move both consumer confidence
and consumer purchases. However, the success of any new stim-
ulus will depend in great part on how the consumer assesses
the potential inflation - any impact of that stimulus as well
as his expectations of rising or falling food prices. The
Republicans have succeeded in convincing the consumer that
higher deficits mean more inflation. To the degree the consumer
judges that any new stimulus will increase the deficit and thus
increase inflation/food costs, the success of the stimulus in
motivating him to purchase will be decreased.
-58-
Therefore, whatever fiscal package is undertaken,
President Carter must also concurrently address the basic
fear of inflation. If he succeeds in convincing the public
that he understands their concern with inflation (particularly
food prices) and will address that concern, then the consumer
perched on the edge of increased spending will be more likely
to take the plunge.
There is already a belief that the new President will
be good for the economy; therefore he has a better than aver-
age chance to stimulate confidence by statements and symbolic
actions. In announcing any economic stimulus package, there-
fore, I strongly urge that the President also announce an
"inflation offensive" targeted at the family budget. A
strategy which emphasized and dramatized efforts and programs
to substantially stabilize prices in the household sector
would be understood and positively received by every consumer.
It would probably have both positive impact on consumer con-
fidence and on our political standing. Tax reform might also
be added to the question of inflation in the household sector.
A strategy which focussed public attention on controlling the
price of frequently purchased basic necessities would help
shift the public away from the politically explosive idea of
wage-price controls.*
Of course, any household inflation strategy requires
the issues staff to formulate some proposals and programs in
*The Exploratory Project for Economic Alternatives co-directed
by Gar Alperovitz has initiatied studies in this area which I
have drawn on heavily.
-59-
the immediate future. Reforms in housing, food, health, energy
and taxes which are likely to be proposed at some point anyway
could be united in an appealing framework, however, if we focus
them into an anti-inflation package.
All in all, we need to view inflation from the citizen-
consumer point of view rather than simply from the statistical-
economic point of view. This will help us build public support
for all our economic proposals and provide a political framework
for achieving economic action. While some may criticize the
approach, as it sometimes has little relationship to "real"
economic theory, I feel strongly that any economic effort that
fails to deal with consumer reality is in jeopardy. While
any real program would take several years to formulate and
accomplish, the statement of intent and purchase could have an
early impact and would be the key first step.
-60-
Appendix Two - The need for an accommodation framework
Throughout the campaign, one of the major themes Governor
Carter raised was the need to unify the country by drawing
directly on the strength of the American people in solving
the country's problems. Our surveys revealed a desire for
unity and for public order. Exhausted by the passionate
quarrels of recent years, there exists a willingness right
now to establish a framework which would permit various groups
to come together and resolve differences. In almost every
sector non-negotiable demands have been replaced by a greater
willingness to compromise and accommodate. The public has
become dissatisfied with the stagnation that results from
the mutual mistrust of business, which it dislikes, and govern-
ment, which it fears.
Traveling the country in recent weeks, I have been impressed
by the strong desire of major corporate executives to find
ways to reach an accommodation with the government and the public.
The pressures of consumerisim, increased regulation, and our
changing society have reached people who only a couple of years
ago displayed little more than contempt for any notion of
responsibility. Now I find an almost desperate desire to con-
tribute some kind of order that permits both economic success and
social responsibility. Of course they are motivated to some
degree by selfish economic concerns, but I feel altruistic
motives also play a part. These people want to find a way to
contribute to a national understanding that lays out the nation's
-61-
goals and a course of action which accomplishes those goals.
They are frustrated by the environment of accusations, sus-
picion, and recrimination that we've had.
After a recent speech I was asked to sum up in a word
or phrase what relationship I thought the average person
wanted between government and business. I had to respond
with two words: If it were a relationship between just the
two sectors then the average person wanted "hostility", so
that a balance of tension would protect him from both. If
he could benefit, however, the average person wants a "partner-
ship".
Though most Americans believe in the free enterprise system,
they mistrust business. And, although they believe deeply
in the political system, they have little faith that the govern-
ment really represents people. The average person, worried
about the future, scarred by the past, unable to find any clear
national goals, fearful of a changing society, desires a pro-
cess where clearcut roles are defined and processes are agreed
upon which accommodate these roles. However, citizens do not
trust any group or person to represent their interests. All
in all, they want a new "social contract".
With this preamble I think President Carter could substan-
tively and symbolically produce an accommodation between
leaders of government, business, the consumer movement, labor,
the environmental movement, farmers, and, or course, ordinary
citizens. The goal would be to produce a national agenda
-62-
with clear goals and a definition of responsibilities. A
national group, picked by the President, could be formed to
begin talking about the problems. It could meet regularly,
supplemented by some staff work and subgroup meetings. Under
no circumstances should it be a "commission" that gets one-
day media notice and disappears, with a staff doing a "report".
Instead, it should be comprised of the principal officers of
various groups and of ordinary citizens, who actually do the
work. The President would have to be active in the effort
since he could give it the legitimacy it needs.
The group should be made up of serious, goal-oriented
individuals more interested in an end-product than in personal
aggrandizement. The national group could be the model for
similar local and state groups and perhaps for special task
forces that would involve (as did the Johnson secret task
forces) bright, young, little-known figures, coming together
on special projects and providing new ideas and new faces to
the Administration. We would have a kind of national "town
meeting" providing both a "dialogue" on problems and hopefully
some answers.
I don't believe the idea is as crazy as it seems. There's
a national yearning for some kind of effort to bring us together.
A success would strike a deep and significant chord in the
country.
THE FOLLOWING MEMO HAS BEEN RETYPED BECAUSE WHEN IT WAS TRANSMITTED,
THE COPY WAS so BAD THAT WE FIGURED IT WOULD NOT TRANSMIT AGAIN AND
BE CLEAR TO ANYONE. MAXIE AND CAROLYN
* Indicates Gov. Carter's notations on memo.
MEMORANDUM
*To Pat
TO: Governor Carter
CC Ham
Jody
FROM: Pat Caddell
J
RE: Further thoughts on strategy discussions
DATE: 10 January 1977
I have only a couple of points I want to raise with
you in this hectic period, and I'll list them as follows:
(1) If we are really going to develop an effective
political strategy and a timetable, it is impor-
tant that we formalize the process as I recom-
* Ham
mended in my memo. I hate to keep harping on
do this
the problem, but unless you give specific instruc-
J
tions for the formation of such a group, it will
not happen and there will not be any ongoing
consideration of strategy, goals, or the imple-
mentation of timetables.
(2) In the appendix to my working paper I raise the
point about the need for an accommodation process
between the people, the government, and various
* Yes
groups. I am anxious to know whether or not you
PRESERVATION PURPOSES
ELECTROSTATIC REPRODUCTION MADE FOR
think that's a viable point that ought to be
pursued by some of us in greater detail.
(3) Some Cabinet officers have asked about the working
paper sent to St. Simons'. Do you want me to
* Yes
prepare a summary paper of that document for their
use?
(4) At the Inaugural a number of receptions are planned,
including one for the Democratic National Committee.
I think it is crucial that you either have a separate
* Ham --
reception - or include at the DNC reception - a
Try to
gathering of your state coordinators and other key
do this
political people, so that you will have the oppor-
or equi-
tunity of personally thanking them for their efforts
valent
during the campaign. There have been some grumblings
J
that there has been no appreciation expressed for the
Memo to Governor Carter, Page Two
10 January 1977
efforts of these people in the fall. This can
be alleviated rather easily, and it would also
help strengthen your political posture in the
states.
(5) The first fireside chat - As I mentioned to you
at the conclusion of the St. Simons' Cabinet
meeting, I am quite concerned with the fact that
the press seems determined to portray your admin-
istration as one that's not going to keep its
campaign promises. Every slight deviation they
perceive is being blown into a giant incident by
the press. Since the credibility of the admin-
istration is critical to your success and to the
political process in general, I recommend that
* Jody
you go "over the heads" of the press in the near suggestion?
future to deal with this problem. As you yourself
J
suggested after the election, there's a good reason
to have a fireside chat which would focus on a
delineation of your campaign promises, an explanation
of how you're going to accomplish them, and a time-
table for accomplishing them, to give people a gen-
eral sense that you're committed to what you've
promised. I think this could be extraordinarily
effective with the people, and diffuse this contin-
ual harping by the press. The best of circumstances
would be to have it before the Inaugural. If this
is not realistic, however, then it should be done
almost immediately after the Inaugural, before you
get into the process of proposing substantive pro-
grams. If this constant questioning of your cam-
paign promises is not checked, it could lead to
serious problems almost immediately. You have the
opportunity for tremendous positive results. I've
mentioned this to Jody; perhaps you might want to
talk to him and the others about it.
CAMBRIDGE SURVEY RESEARCH INCORPORATED
12-14 Millin Place Cambridge Massachunetts 02138 617/061-3212
MEMORANDUM
To Pat
TO: Governor Carter
CC Ham
FROM: Pat Caddell
Jody
RE: Further thoughts on strategy discussions
J
DATE: 10 January 1977
I have only a couple of points I want to raise with
you in this hectic period, and I'll list them as follows:
(1) If we are really going to develop an effective
Ham
political strategy and a timetable, it is impor-
tant that we formalize the process as I recom-
do this
mended in my memo. I hate to keep harping on
the problem, but unless you give specific instruc-
tions for the formation of such a group, it will
J
not happen and there will not be any ongoing
consideration of strategy. goals, or the imple-
mentation of timetables.
(2) In the appendix to my working paper T raise the
point about the need for an accommodation process
between the people, the government, and various
yes
groups. I am anxious to know whether or not you
think that's a viable point that ought to be
pursued by some of us in greater detail.
(3) Some Cabinet officers have asked about the working
paper sent to St. Simons', Do you want mo to
prepare a summary.papor of that document for their
yes
use?
(d) At the Inaugural a number of receptions are planned,
including one for the Democratic National Committee.
Ham
I think it is crucial that you either have a separate
reception - or include at the DNC reception - a
gathering of your state coordinators and other key
Tryto
political people, so that you will have the oppor-
do This
tunity of personally thanking thom for their offorts
during the campaign. There have been some grumblings
or,
that there has been no appreciation expressed for the
equivalent
J
Homo to Governor Carter, Page Two
10 January 1977
efforts of these people in the fall. This can
be alleviated rather easily. and it would also
help strengthen your political posture in the
states.
(5) The first firoside chat - As I mentioned to you
at the conclusion of the St. Simons' Cabinot
mueting, I am quite concerned with the fact that
July
the press seems determined to portray your admin-
istration as one that's not going to keep its
campaign promises. Every slight deviation they
perceive is being blown into a giant incident by
suggestion?
the press. Since the credibility of the admin-
istration is critical to your success and to the
political process in general. I recommend that
J
you go "over the heads" of the press in the near
future to deal with this problem. As you yourself
suggested after the election. there's a good reason
to have a fireside chat which would focus on a
delinsation of your campaign promises, an explanation
of how you're going to accomplish them, and a time-
table (or accomplishing them. to give people a gen-
eral sense that you're committed to what you've
promised. T think this could be extraordinarily
effective with the people, and diffuse this contin-
wal harping by the press. The best of circumatances
would be to have it before the Inaugural. If this
is not realistic, however, then it should be done
almost immediately after the Inaugural, before you
got into the process of proposing substantive pro-
grams. If this constant questioning of your cam-
paign promises in not checked. st could lead to
serious problems almost inmediately. You have the
opportunity for tromendous positive results. I've
mentioned this to Jody: purhaps you might want to
talk to him and the others about it.
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