Nearly Two in Three Consumers Say the Economy Is Getting Worse

GALLUP NEWS SERVICE

PRINCETON, NJ -- As oil prices soar past $70 a barrel in response to the potential damage created by Hurricane Katrina, there are widespread predictions of another surge in gas prices at the pump, and a slowdown in the U.S. economy. While the coming "soft-patch" in the economy will most likely be attributed to Katrina, the reality is that consumers' expectations for the economy were already tumbling in response to increasing gas prices prior to the storm hitting southern Louisiana on Monday (Aug. 30).

In a new Gallup Poll (Aug. 22-25), taken about a week before Katrina hit the Gulf Coast, two in three consumers say the economy is getting worse while only 28% say it is getting better. This suggests that the modest declines reported by both the University of Michigan on Friday (Aug. 26) and the Conference Board on Monday (Aug. 30) were significantly out-of-date even as they were announced. Of course, Katrina ,and the storm's aftermath, are likely to significantly exacerbate consumers' already plummeting expectations.

Consumer Expectations for the Economy

In this latest poll, 63% of consumers say current economic conditions in the country as a whole are "getting worse." This is the highest level of negative economic expectations recorded by Gallup since just before the beginning of the war in Iraq (March 3-5, 2003) when the percentage of consumers saying economic conditions were getting worse reached 67%.

Most Important Economic Problem

The worsening of consumer expectations appears to be closely associated with consumer concerns about surging fuel and oil prices. When asked to name the most important economic problem facing the country today, 34% of consumers point to increasing fuel and oil prices as August comes to a close. This is up 20 percentage points from July 25-28 and 15 percentage points from April 18-21. It is also more than twice the percentage of consumers who mention unemployment/jobs/wages and three times the number who point to the war with Iraq as the most important problem.

Gas Prices and Consumer Expectations

In fact, the relationship between higher gas prices at the pump and consumers' negative expectations for the economy is stunning. Gasoline prices averaged $1.78 as of Jan. 3, 2005 according to the Energy Information Administration. Gas prices peaked for the first half of the year at $2.28 on April 11, 2005, and were at $2.24 on May 2, 2005. The percentage of consumers saying economic conditions were getting worse increased from 42% in early January to 61% in late April and early May.

Gas prices fell steadily from their April peak, declining to $2.12 a gallon by early June. Over the same period, the percentage of consumers saying economic conditions were getting worse dropped to 55% in June from the 61% of late April and early May.

Since June, gasoline prices have significantly increased once more and averaged $2.61 a gallon as of Aug. 27, 2005 -- up $0.83 from January. Although there was a lag in the consumer response to these price increases, the percentage of consumers saying the economy is getting worse surged to 63% in Gallup's Aug. 22-25 poll -- up 11 percentage points from early August and 21 percentage points from January.

Family Finances

More than 4 in 10 Americans say they are worried about their family's finances right now with 17% saying they are "very worried" and 27% saying they are "somewhat worried." However, the amount of worry differs significantly by income. One in four consumers having annual incomes of $100,000 or more say they are worried about their family's finances. Nearly twice as many (45%) of those with annual incomes of between $30,000 and $50,000 say they are worried. And, two in three of those with incomes under $30,000 a year say they are worried about their family's finances.

In a letter released July 18, 2005, Federal Reserve Board Chairman Alan Greenspan told Congress that higher energy prices may restrain economic growth by three-quarters of a percentage point this year. While this doesn't sound too bad, this prediction preceded the August surge in pump prices and the arrival of Hurricane Katrina.

Past Gallup polling suggests that there is a severe psychological effect on consumers when gas prices at the pump hit $3.00 a gallon. Whether gas prices reach that level on average across the nation and whether it has a more severe impact on consumers or not, clearly today's gas prices and the plunging consumer expectations they create threaten another economic soft-patch.

How likely are consumers to continue buying SUVs, even at "employee prices" given the surge in fuel costs? Can the housing boom continue as the cost of heating and cooling those homes soars? More importantly, what will happen to consumer spending as higher gas prices disproportionately impact lower- and middle-income families and those who have to drive long distances to reach their jobs?

Right now, it looks like the "Oil Grinch" may succeed in stealing Christmas, particularly from many lower- and middle-income consumers as well as the retailers and other companies that serve them.

Survey Methods

Results are based on telephone interviews with 1,007 national adults, aged 18 and older, conducted Aug. 22-25, 2005. For results based on the total sample of national adults, one can say with 95% confidence that the maximum margin of sampling error is ±3 percentage points.

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.