What the Average American Knows that We Don't

Consumer confidence as measured by the University of Michigan rose for the fourth month in a row in May. Historically, a marked rise in this measure signals the end of economic contraction. Perhaps happy days are here again indeed and the Frugal Scotsman and his loyal assistant - yours truly - will have to find other ways to occupy our time instead of reporting on a Depression that never quite materialised.

Perhaps Mr. and Mrs. Average, seeing the big banks pass their 'stress tests' with flying colours, know that the worst of the credit crisis is in the past. Never mind that bankruptcies in May are up 37 percent from last year, or foreclosures up 18 percent.

Perhaps our high school-educated economists sense immanent job recovery in spite of the chain of record continuing unemployment claims.

We really do wonder where they are getting their information. As far as we can tell, the economic scene is pretty horrid with little hope of anything better than further crashing ahead. But somehow the masses are optimistic. Why? How?

As best as we can reckon it, the recovery story runs something like this: Sure, the economy is contracting - but not as fast as it was at the end of 2008. So, since the contraction is decelerating, pretty soon the contraction will stop and turn into growth.

Perhaps this story will come true. Time will tell, of course. The key thing to watch for is if contraction rates continue moderating, or if the compounding of bankruptcy, delinquency, foreclosure, unemployment, and so forth will re-accelerate the collapse in production.

If the masses are right (and we certainly wouldn't mind if the are - we could use some prosperity ourselves!), then all will be well. If they are misjudging the situation, then the letdown, disillusionment, anger and psychological depression will be extreme. To us though, the recovery story looks like the Bargaining Stage of the grieving process.