Investors More Optimistic About the Economy in October

GALLUP NEWS SERVICE

PRINCETON, NJ -- Investor optimism increased for the second month in a row as investors have become increasingly hopeful about the future performance of the overall economy according to the October Index of Investor Optimism. Clearly, investors have a lot to be optimistic about, including sharply lower energy prices, new records being set on Wall Street, stable interest rates, and increasing optimism that the United States will experience an economic "soft-landing." Given all this good economic news, the real question is: Why aren't investors even more optimistic?

Investor Optimism Continues to Increase in October

The Index of Investor Optimism increased five points in October, on top of its 21-point increase in September, and now stands at 79 -- its highest level in seven months. This matches where the Index was in March of this year. The Index is now 32 points higher than it was a year ago. Investor optimism hit its high for the year in January (93) and its low for the year in August (53). The Index is conducted monthly and had a baseline score of 124 when it was established in October of 1996.

This October's increase occurred largely in the Economic Dimension of the Index as investors became more optimistic about an economic soft-landing and a surging stock market. The Economic Dimension increased 6 points in October on top of its 12-point increase from September, and now currently stands at 17. Investors as a whole were essentially neutral on the economy just two months ago when the Economic Dimension of the Index was at -1. They are now somewhat more optimistic about the economic outlook over the next 12 months.

The Personal Dimension decreased one point to 62 in October. However, it remains substantially above its August level of 54 -- and its level from this time last year, 55. Investors as a whole appear fairly optimistic about achieving their portfolio goals for the next year -- but do not seem nearly as euphoric as the surge in the Dow to 12,000 late last week would seem to imply.

Sharp Decline Gas Price Expectations

Investor concerns about high energy prices continued to decline in October as the percentage of investors saying they believe energy prices are hurting the investment climate "a lot" fell to 58% -- down 5 percentage points from the 63% of September and down 20 percentage points from the 78% who felt this way in August. This stands in sharp contrast to the 80% of investors who held this view in October a year ago.

The decline in energy prices over the past month has not only encouraged investors about the current economic situation, but has also changed investor expectations for future gas prices. In August, investors said they expected the average price of a gallon of regular gas to reach $3.30 in the next three months. In September, their expected price for a gallon of gas three months from now was down to $2.76. This month, these expectations fell to $2.45 -- meaning that investor price expectations for a gallon of gas have fallen $0.85, or about 25%, over the past two months.

International Worries Now Match Energy Concerns

Nearly as many investors (55%) point to international tensions -- including those in the Middle East and in North Korea -- as indicate energy prices as hurting the current U.S. investment "a lot." This change in relative perceptions has occurred not because geopolitical concerns have increased, but rather because investors are comparatively less concerned about overall energy prices.

Investors Expect "Soft-Landing"

Investor expectations for a so-called "soft-landing" for the U.S. economy also increased as the percentage of investors saying we are experiencing a "recovery" or an "economic expansion" improved from 38% last month to 43% this month. Another 44% say the economy is in a "slowdown" while only 1 in 10 investors say they believe we are in a recession.

While investors are slightly less concerned about conditions in the housing market this month than in September, most investors seem to believe that the real estate markets are going to get worse before they get better -- not only nationally, but in their local communities as well. Six in 10 investors continue to rate conditions in today's residential real estate market nationwide as "only fair" (45%) or "poor" (14%) -- essentially the same as in September. Two in three investors (68%) say economic conditions in the residential real estate market nationwide are getting worse, as opposed to only 26% who say they are getting better. This is a slight improvement from the 74% and 21% of investors, respectively, who felt this way in September.

More than half of investors rate conditions in their local residential real estate market as "only fair" (37%) or "poor" (18%) in October -- about the same as the 53% who held this view about their local market last month. Six in 10 investors (59%) say conditions in the local residential real estate market are getting worse. This is an improvement from the 65% who felt this way last month. But this percentage still suggests that many local real estate markets have some way to go before they reach the bottom.

Will Retailers See Their Best Christmas Sales in Years?

As we noted last month, and as a separately reported Gallup Poll on holiday spending was released, the chance that retailers will have a great Christmas sales season are better than they have been in years. For example, investors are more likely to spend freely this Christmas season with the Investor Optimism score this month being at its highest level for any October since 2001. Plunging gas prices and a surging stock market mean all consumers -- not just the upper-income but also middle- and lower-income Americans -- will have more money to spend this Christmas.

Given all the positive economic news, one can only wonder why investors aren't even more optimistic. Investor optimism remains well below its high for the year of 93 in January, and even its level of a decade ago in October 1996 when it was at 124. Part of the answer may lie in the way both the U.S. auto industry and the residential real estate sector are suffering. Another factor may be attributable to concerns over job security as job outsourcing to countries overseas continues unabated. However, the most significant factor tempering investor optimism may be gas price volatility that may have many Americans feeling the recent plunge in gas prices at the pump is only temporary.

Still, whatever their concerns, consumers and retailers alike have reason to celebrate if this Christmas sales season turns out to be as strong as it looks right now.

Survey Methods

Results for the Index of Investor Optimism Poll are based on telephone interviews with 802 investors, aged 18 and older, conducted Oct. 1-15, 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.