Victory in Iraq and at the Cash Register?

by Dennis Jacobe, PhD
Chief Economist, The Gallup Organization

As victory unfolds in Iraq, Gallup Poll economic data suggest that the war's economic rally effect is more moderate and much less enduring than many of us had hoped. According to a Gallup Poll conducted April 7-9* -- as Saddam Hussein's statue was falling in Baghdad -- U.S. consumers intend to spend and borrow less while saving more during the next six months.

Consumer Confidence Remains Weak

While consumer confidence has improved somewhat since the war began, the immediate boost in confidence has already begun to dissipate. As a result, consumer confidence remains at very low levels, with 27% of Americans rating current economic conditions as "good" or "excellent" and 22% rating them as "poor" -- a positive difference of five percentage points. This stands in sharp contrast to a year ago (April 8-11, 2002), when this consumer sentiment differential was +27 percentage points -- only 11% of Americans rated current economic conditions as poor while 38% said they were good or excellent. Further, in the April 2003 poll, half of Americans (51%) told Gallup that economic conditions in this country as a whole are "getting worse" while only 36% said they are "getting better."

More Consumers Plan to Spend Less

More consumers (26%) say they plan to decrease their level of spending over the next six months than say they plan to increase it (22%), for a negative differential of four percentage points. This is better than the consumer spending intentions differentials of -7 in March and -11 in February, but not as good as a year ago when the differential was -1. This percentage-point difference shrank during the first half of 2002 and disappeared in May 2002, with 24% of consumers saying they planned to spend more and an equal percentage saying they planned to spend less. During the second half of 2002, this improved outlook for consumer spending dissipated.

Consumers Also Plan to Borrow Less

More consumers also plan to borrow less than plan to borrow more in the months ahead. Forty percent of consumers plan to borrow less, while only 15% plan to borrow more. Once again, these percentages and the differential of -25 are better than the consumer borrowing intentions differential of February and March (-27). April's differential is also better than the -28 of April 2002, possibly reflecting the recent increase in auto sales.

Consumers Plan to Save More

More consumers are planning to save more than save less over the next six months. More than a third of consumers (37%) say they plan to save more, while only 15% say they plan to save less. This consumer saving intentions differential of 22 is up from the differentials in February (15) and March (17), but down from the differential of 30 percentage points in April 2002.

More Consumers Expect Their Incomes to Increase

While more consumers are planning to spend and borrow less over the next six months, more also expect see their incomes increase over the same period. Thirty-five percent of consumers expect their incomes to increase over the next six months, while only 11% expect their incomes to decrease. This consumer income expectations differential of 24 is down from 29 in March and 36 a year ago.

Bottom Line

The war's economic rally effect has improved consumer confidence and consumer spending/borrowing intentions. Add in declining energy prices plus the unexpected strength in March retail sales, and it is not surprising that many economic prognosticators and government policy-makers seem tempted to believe that the economy can recover on its own.

However, consumer spending intentions are very fragile. Consumer confidence has already declined from its peak following the beginning of the war. The University of Michigan's consumer sentiment numbers only reflect the immediate impact of the war and not the subsequent decline. The unemployment situation is awful. The economy lost more than a quarter of a million jobs during the first quarter. Consumer income expectations are much lower than they were a year ago.

In my view, both the Michigan consumer sentiment numbers and the March retail sales numbers are being misinterpreted. Gallup's more up-to-date consumer confidence measures do not imply that victory in Iraq will have the huge positive impact on the economy that many suggest.

*Results are based on telephone interviews with 1,018 national adults, aged 18 and older, conducted April 7-9, 2003. 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%.

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