U.S. Investor Optimism Declines in May

by Dennis Jacobe, Chief Economist

Energy prices, the federal budget deficit, and unemployment concern investors most

PRINCETON, NJ -- U.S. investor optimism declined in May, as the Wells Fargo/Gallup Investor and Retirement Optimism Index fell to 33 from 42 in February. The index's decline was driven by nonretirees, whose score fell to 24 in May from February's 35. Retirees' optimism was unchanged at the higher level of 61.

Wells Fargo/Gallup Investor and Retirement Optimism Index, 2000-2011 Trend for May, Plus February 2009 and 2011

The Wells Fargo/Gallup Investor and Retirement Optimism Index is a broad measure of investor perceptions that tends to be a precursor of future economic activity and is consistent with a future decline in the overall U.S. economy. It reached its record low of -64 in February 2009 -- just before the equity markets reached bottom in March 2009. The Index peaked at 178 in January 2000, just before the dot-com bubble burst.

Energy Prices Leap to the Top of Investor Concerns

When asked to evaluate the impact of 15 factors on the U.S. investment climate, investors rate the price of energy, including gas and oil, as their top worry, with 79% saying it is hurting the U.S. economy a lot, up from the 60% who held this view in February. Energy price worries jumped ahead of the next two top concerns -- the federal budget deficit and the unemployment rate.

Still, concern about the budget deficit remains high and is even higher today than it was in February when it was tied for the top concern; 75% of investors now say the deficit is hurting the economy a lot. Concern about unemployment is down slightly, with 67% expressing a high level of concern about its impact on the economy.

Now I am going to read you some possible situations that could affect the investment climate in the United States. For each one, please tell me whether you think that situation is hurting the investment climate in the United States a lot, hurting it a little, having no effect on it, helping it a little, or helping the investment climate a lot? % Hurting it a lot, February and May 2011

Investors rank the financial condition of state and local governments fourth among their worries, and "a politically divided federal government" fifth as a factor of concern -- ahead of the debate over raising the federal debt ceiling, home values, and new healthcare regulations. Their concerns about interest rates and new financial regulations rank at the bottom of the list.

Investors' Views Are Consistent With Economic "Soft Patch"

Recent economic data seem consistent with the recent decline in investor optimism. Gallup tracking shows consumer spending was comparatively weak in May, as do the early chain-store sales results. Unemployment and underemployment as measured by Gallup show virtually no improvement compared with a year ago. Friday's U.S. jobs report indicates that the government's evaluation of the unemployment situation is getting closer to Gallup's.

Oil prices running at $100 or more a barrel and gas prices of $3.75 or more per gallon would seem to explain why energy prices are investors' top worry about the U.S. investment climate. Similarly, investors have reason to be concerned about the potential impact of the federal budget deficit on the investment climate, and the continuing battles in Washington about how to handle the deficit. It makes sense that investors rank the unemployment rate third, given that government reports before last Friday had shown a generally downward trend in the unemployment rate this year.

Gallup's economic data tend to confirm that the U.S. economy is now experiencing an economic "soft patch." What makes this worse is that it follows an anemic economic recovery in which over half of Americans do not yet see an end to the recession.

The key question going forward is whether this soft patch is transitory, as the Fed suggests, or is something of even greater concern. Those arguing that the current economic slowdown is temporary point to factors including the weather, the disasters in Japan, and high gas prices. They suggest the economy will get going again on its own once these disruptions are over.

On the other hand, the recent drop in investor optimism and five straight weeks of declines in the Dow may suggest that many investors fear these issues are not so transitory.

Survey Methods

The Wells Fargo/Gallup Investor and Retirement Optimism Index results are based on questions asked on the Gallup Daily tracking survey of a random sample of 1,099 U.S. adults having investable assets of $10,000 or more from May 2-11, 2011.

For results based on the total sample of investors, one can say with 95% confidence that the maximum margin of sampling error is ±4 percentage points.

Interviews are conducted with respondents on landline telephones and cellular phones, with interviews conducted in Spanish for respondents who are primarily Spanish-speaking. Each sample includes a minimum quota of 400 cell phone respondents and 600 landline respondents per 1,000 national adults, with additional minimum quotas among landline respondents for gender within region. Landline telephone numbers are chosen at random among listed telephone numbers. Cell phone numbers are selected using random-digit-dial methods. Landline respondents are chosen at random within each household on the basis of which member had the most recent birthday.

Samples are weighted by gender, age, race, Hispanic ethnicity, education, region, adults in the household, and phone status (cell phone only/landline only/both, cell phone mostly, and having an unlisted landline number). Demographic weighting targets are based on the March 2010 Current Population Survey figures for the aged 18 and older non-institutionalized population living in U.S. telephone households. All reported margins of sampling error include the computed design effects for weighting and sample design.

In addition to sampling error, question wording and practical difficulties in conducting surveys can introduce error or bias into the findings of public opinion polls.

For more details on Gallup's polling methodology, visit

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