GALLUP NEWS SERVICE
PRINCETON, NJ -- Investor optimism surged in September, as the Index of Investor Optimism soared 21 points to reach 74 -- its highest point since March. Obviously, plunging gas prices at the pump play a role in today's increased investor optimism. So does the perception among investors that the Federal Reserve Board may be successful in its efforts to maneuver to a so-called soft landing for the U.S. economy.
Still, investors continue to worry about economic conditions in the residential real estate markets, leading to the key question: "Can plunging gas prices offset the sharp drop in housing activity and save the holiday spending season?"
Investor Optimism Soars in September
The Index of Investor of Investor Optimism stood at 93 in January 2006. The Index steadily declined from its January level and was down by 40 points, at 53, in August. The September surge offsets more than half of that total drop in the Index.
Both the Personal and Economic Dimensions of the Index increased sharply in September. The Personal Dimension increased by nine points, from 54 in August to 63 in September, indicating that investors are considerably more optimistic about their personal portfolios than they were a month ago. At the same time, the Economic Dimension increased by 12 points, to 11 in September from -1 in August, signifying that investors as a whole have gone from being essentially neutral to somewhat optimistic about the economic outlook over the next 12 months.
Gas Price Expectations Improving
In September, 63% of investors said the price of energy, including gas and oil, was hurting the overall investment climate a lot. While this continues to be a high percentage, it is down 15 points from August and is the lowest level of concern among investors since February 2005, when 56% of investors voiced this degree of concern.
Significantly, investor expectations for gas prices also dropped sharply this month. In August, investors said they expected gas prices at the pump to average $3.30 a gallon in three months. In September, they say they expect gas prices in three months to average $2.76 a gallon -- higher than current pump prices but nearly 20% below their price expectations of just a month ago.
Investors Expect "Soft Landing"
Half of the nation's investors describe current economic conditions in the United States as a slowdown. Another 38% say today's economy is in either a recovery (16%) or a sustained expansion (22%). Only 10% say the economy is now in a recession. An economic slowdown that avoids recession seems like a pretty good definition of the Fed's hoped-for economic soft landing.
Real Estate Market Conditions Are Getting Worse
In September, 6 in 10 investors rate current conditions in the real estate market nationwide as "only fair" (46%) or "poor" (14%). This is up from 56% who held this view in August and from 46% in June and July. Three in four investors (74%) say conditions in the real estate market nationwide are getting worse -- up from 63% in June, 68% in July, and 70% in August.
More significantly -- because investors are best able to describe conditions in their local communities -- 53% of investors rate current conditions in their local communities' real estate markets as "only fair" (37%) or "poor" (16%), up from 43% who held this view in June. Two in three investors (65%) say conditions in their local real estate markets are getting worse -- up from 48% holding this view in June.
Boosting Retail Sales
Plunging gas prices have essentially the same economic effect as a significant tax credit disproportionately aimed at middle- and lower-income Americans. As was the case in late 2001, when the federal government sent out tax-credit-based checks, the sharp drop in gas prices at the pump should increase retail sales just in time for the holidays, particularly at middle- and lower-income-focused retailers like Wal-Mart.
On the other hand, the residential real estate markets continue to exhibit every sign of an old-fashioned housing debacle even as mortgage rates decline and refinancing activity picks up. Can tumbling gas prices offset or even reverse the negative direction of today's housing and auto markets? The answer is far from clear, but if gas prices stay down or go even lower, the odds of a soft landing for the U.S. economy are much better than just a month ago.
Survey Methods
Results for the Index of Investor Optimism poll are based on telephone interviews with 802 investors, aged 18 and older, conducted Sept. 1-17, 2006. 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. 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.
