Consumers' Optimism Continues to Build

by Dennis Jacobe

This, despite weaker-than-expected December retail sales and increasing gas prices


PRINCETON, NJ -- New Gallup Poll economic data show that consumers are increasingly optimistic about current economic conditions. So, why did December's retail sales numbers come in lower than expected? More importantly, will today's increasing consumer optimism translate into improving retail sales in the months ahead? In turn, does this mean that the economy may not slow as much as economists expect in the first quarter of 2006?

Rise in Percentage of Consumers Who Say Current Economic Conditions Are Excellent/Good

In Gallup's Jan. 9-12 poll, 43% of consumers say current economic conditions are excellent or good while 18% say they are poor. This positive difference of 25 percentage points is considerably better than the 17-point differences in two December polls and the 11- to 13-point differences in November. Of course, it is also far better than the 2- to 6-point differences of September and October. The January 2006 difference is essentially the same as the 24-point difference of January 2005.

Consumers' Outlook for the Economy Still More Likely to Be Negative Than Positive

Despite the growing optimism about current economic conditions, only 39% of American consumers say economic conditions in the country as a whole are "getting better" right now, compared to 52% who say they are "getting worse." Although more consumers continue to think things are going to get worse rather than better, January's negative difference of 13 percentage points represents a sharp improvement over the negative 31-point difference of early November and the negative 41 to 44 points of September and October. On the other hand, it is essentially the same as the early December difference of -11 percentage points and remains substantially below the positive difference of 6 percentage points in January 2005.

Gas Price Volatility Continues

A possible explanation for the recent moderate increases in consumer optimism relative to the plunge in gas prices may involve the continued volatility of oil prices and gas prices at the pump over the past year. Many lower- and middle-income consumers have experienced minimal income gains during the past few years. The real disposable incomes of these consumers have been squeezed as gas prices have surged, forcing them to cut back on other purchases. Even as gasoline prices have plunged and job market conditions have improved, many of these consumers have good reason to hold back on their spending, for fear of another surge in gas and energy prices.

Unfortunately, it now appears that gas prices at the pump have bottomed out and are headed up once more.

A year ago, the average price of a gallon of regular gas across the United States was about $1.80, according to the Energy Information Administration. Pump prices peaked at $3.04 in early September. Since then, prices have plunged rapidly, reaching as low as $2.12 per gallon in late November. However, gas prices are going up once more -- having increased about 9 cents a gallon in the past week alone -- and now average $2.32 a gallon across the nation.

Uncertainty Holding Back Consumer Optimism and Retail Sales

Some may argue that such consumer uncertainty about gas prices at the pump may be good if it forces people to make decisions aimed at conserving existing gas supplies. Obviously, increased conservation is a plus for the current economy.

On the other hand, price volatility of such a basic consumer good, and the uncertainty it produces, usually has a significant economic cost associated with it -- particularly as it affects low- and middle-income Americans. Consumers will bear part of this gas-price uncertainty cost as they are forced to hold back on their spending. Retailers and those who supply them will also incur part of this cost as they experience slowing consumer sales.

While economics tells us that price volatility can be efficient and hedged, the politics of gas price volatility-uncertainty could lead to a highly inefficient result.

Survey Methods

Results are based on telephone interviews with 1,003 national adults, aged 18 and older, conducted Jan. 9-12, 2006. 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.

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