GALLUP NEWS SERVICE
PRINCETON, NJ -- Fed Chairman Ben Bernanke seemed to spell out a "Goldilocks" economic outlook -- current economic conditions being just about right -- in his testimony before Congress earlier this month. The big money on Wall Street seems to agree with him as the Dow Jones Industrials have hit new highs since the chairman's testimony.
Still, the Goldilocks euphoria as reflected by January's surge in consumer and investor optimism may be short lived. Investor optimism took a tumble in February according to the UBS/Gallup Index of Investor Optimism. Investors are concerned about deteriorating conditions in the residential real estate market and the potential for higher gas prices at the pump in the months ahead. Add in the softening of consumer confidence as measured by Gallup's other economic data, and a case might be made that Papa Bear may soon make an appearance on the economic scene.
Investor Optimism Tumbles But Remains High
Investor optimism fell 13 points in February 2007, giving up all of its January gains and returning to 90 -- its level of December 2006. Once again, the Index failed to stay above 100 for more than one month, continuing the pattern that has dominated the Index since December 2000. The Index is conducted monthly and had a baseline score of 124 when it was established in October 1996.
The Personal Dimension, which measures people's optimism about their own portfolios over the next 12 months, fell six points to 67 in February from its 73 of January -- and is now just about where it was at the end of the year (69 in December 2006 and 68 in November 2006). The Economic Dimension, which measures people's optimism about the economy over the next 12 months, dropped seven points in February to 23 from January's 30. It is now also roughly in the range of where it ended last year (21 in December 2006 and 25 in November 2006).
Investors Fear Higher Gas Prices
One reason investor optimism took a tumble in February probably has to do with investors' expectations for future energy prices. Despite today's sharply lower gas prices at the pump, high energy prices continued to top investor concerns in February with 58% saying they believe energy prices are hurting the current investment climate "a lot." This compares with 54% of investors who pointed to international tensions as hurting the investment climate a lot, and the same percentage (54%) who pointed to the federal budget deficit as their major concern.
Investors report paying an average price of $2.21 for a gallon of gas in February. More importantly, when asked about future gas prices, investors say they expect gas prices to average $2.39 a gallon three months from now. These expectations of higher gas prices may explain, at least in part, why only 31% of investors say the lower gas prices of recent months have made them more optimistic about the outlook for the U.S. economy in 2007. Sixty-seven percent say lower gas prices have not had much effect at all on their view of the future course of the economy.
Investors Say Residential Real Estate Conditions Getting Worse
Another reason for the recent drop in investor optimism probably involves their continued concerns about conditions in the residential real estate markets. Many investors believe that the real estate markets are going to get worse before they get better -- not only nationally, but also in their local communities.
Nearly two in three investors (63%) say economic conditions in the
nationwide residential real estate market are getting worse, opposed to only 30% who say they are getting better. Nearly two in three investors also rate conditions in their
local residential real estate market as "poor" (18%) or "only fair" (44%). Fifty-six percent say conditions in the local residential real estate market are getting worse -- this is up from 50% who felt this way last month. This may suggest that many local real estate markets still have some way to go before they reach the bottom or begin experiencing a recovery.
If the Economy Is So Good, Why Is Optimism Declining?
In a Feb. 1-4, 2007, Gallup Poll, 43% of Americans rated current economic conditions in the U.S. as being good or excellent. This is down from the 52% who said this in January and is back to how they rated things in December -- when 42% of Americans held this view. Today, 52% of the public say the U.S. economy is getting worse, not better.
In another early February poll (Feb. 2-7, 2007), the Experian/Gallup Personal Credit Index (PCI) remained unchanged at 105. This matched the same high number in January of this year, but did not build on the momentum of the Index of the past couple of months.
The point is that while many on Wall Street and at the Fed may be celebrating a "Goldilocks" economy, Gallup's attitudinal economic data suggest that many average American consumers and investors are not yet convinced. In this regard, they may have good reason to be cautious since, traditionally, a sharp downturn in autos and housing has produced job layoffs and an economic slowdown -- if not a recession altogether. On the other hand, globalization, easily available credit as reflected by the PCI, and continued, if modest, job growth may mean the old rules no longer apply. If the U.S. economy can avoid recession, or even a significant economic slowdown in 2007, there will be strong new evidence supporting this latter point of view.
Survey Methods
Results for the UBS/Gallup Index of Investor Optimism poll are based on telephone interviews with 801 investors, aged 18 and older, conducted Feb. 1-15, 2007. 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.
Results for the Experian/Gallup Personal Credit Index poll are based on telephone interviews with 1,007 adults, aged 18 and older, conducted Feb. 2-7, 2007. For results based on the total sample of investors, one can say with 95% confidence that the maximum margin of sampling error is ±3 percentage points.
Results for the Gallup Poll are based on telephone interviews with 1,007 national adults, aged 18 and older, conducted Feb. 1-4, 2007. 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.
