Too Early to Celebrate: Second-Half Outlook Still Unclear

The greater-than-expected improvement of the economy (5.8% GDP growth) in the first quarter of 2002 is great news, but not entirely unexpected. Actually, the improvement is fully consistent with the first-quarter surge in the Gallup/UBS Index of Investor Optimism and the upturn in Gallup's consumer ratings of current economic conditions.

In April, however, investor optimism plunged (see "Substantial Investors, Substantial Volatility" in Related Items at right) and consumer ratings of the economy stayed at their March levels. In fact, Americans continue to rate economic conditions as just a little better than they were last year, although their expectations for the future are far more positive than they have been at any time since late 2000. This major contradiction between public perceptions of current economic conditions and expectations for the future suggests the U.S. economy is at a key turning point.

If the real economy -- corporate profits, capital expenditures, final demands -- improves during the months ahead, there is a solid foundation in public perception that suggests a good second half. On the other hand, if the real economy does not improve, then the resulting consumer/investor negativity could produce economic stagnation or even a double-dip recession.

The recent volatility of the Index of Investor Optimism, combined with the major contradiction in consumer ratings, leads me to suggest that business decision makers adopt a cautious approach toward the second half of 2002. My bet is that the economy's strong first-half performance is borrowing from its expected growth in the future. That is, the rate of inventory adjustment-based growth during the first half of the year will not be justified by final demands, corporate profits or capital spending. In turn, this means that consumer expectations will not be met, and as a result, we will have a much weaker-than-expected second half.

Consumer Ratings Unchanged in Late April

New Gallup Poll economic data (April 22-24)* show that 39% of Americans rate national economic conditions as good or excellent. This is essentially the same level recorded earlier this month (38% on April 8-11) and up from March (34%). As April ends, Americans rate the health of the economy at about the same level as they did in October 2001 (38%).

New data from the latest poll reconfirms findings from earlier this month that more Americans currently believe U.S. economic conditions are getting better (53%) than think things are getting worse (35%). These percentages are little changed from last month, but the complete opposite of the corresponding figures from a year ago (24% getting better/63% getting worse).

*These results are based on telephone interviews with a randomly selected national sample of 1,004 adults, 18 years and older, conducted April 22-24, 2002. For results based on this sample, one can say with 95% confidence that the maximum error attributable to sampling and other random effects is ±3%. 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.