Employee Optimism Eases in April

The new Gallup/UBS Employee Outlook Index* shows that employee optimism dropped slightly in April after surging upward in late March. Unlike investor optimism, employee optimism seems to have peaked shortly after the beginning of the war with Iraq. And, given the current job market, declining levels of employee optimism should come as no surprise:

• Thirty-seven percent of employees tell Gallup their companies have had hiring freezes during the past 12 months.
• Twenty-four percent say the number of employees at their companies has been reduced over the same period.
• The U.S. economy has lost more than half a million jobs over the past three months.
• There are 8.8 million people looking for work in the United States and nearly 2 million have been out of work for 27 weeks or longer.
• The U.S. unemployment rate, at 6%, is now at its highest level since July 1994**.

Obviously, the current "jobs recession" continues to deepen. Is the worsening of the employment situation simply an expected, if unpleasant, result of the war with Iraq? Now that the United States has declared an end to the major fighting in Iraq, is the economy poised for recovery? If so, will employee optimism continue to improve?

Employee Confidence Eases From Its Peak

Prior to the start of the war with Iraq (March 3-5), employee confidence hit a new low of 47. After the war began (March 24-25), however, the Index surged to 72, matching its highest point since its inception a year ago. In April 2003, the Index declined to 67, essentially equaling its December 2002 level of 66.

All three dimensions of the Employee Outlook Index show similar trends during March and April:

• The Present Company Conditions Index (employee confidence in the present conditions at their companies) fell to 69 in early March, but surged to 84 in late March after the war started. However, this dimension eased in April 2003 and now stands at 81 -- below its December 2002 level of 84.

• The Future Company Conditions Index (employee expectations concerning the future prospects of their companies) also was headed for a new low of 47 in early March. Following the beginning of the war, it soared to 75, essentially equaling its November high of 76. The Future Company Conditions Index then declined to 70 in April.

• The Job Security Index was plummeting prior to the war and hit 25 in early March. Like the other two dimensions, the Job Security Index surged upward following the start of the war and reached 57 in late March. In April, it fell eight points to 49.

War Impact May Be Overstated

The Gallup/UBS Employee Outlook survey suggests that the impact of the war on U.S. businesses may have been substantially overstated. By an overwhelming margin of 57% to 7%, employees say that it is the state of the economy, not the war with Iraq, that is hurting their companies -- 35% say neither is hurting their companies. While 41% of employees say the war has affected morale at their companies, the impact seems fairly evenly split: 18% say the war has had a positive impact on the morale of their companies' employees and 21% say the war has had a negative impact. Similarly, 23% say the war has affected productivity at their companies: 7% say the impact has been positive, while 15% say it has been negative.

Unfortunately, the same may be true as far as the positive impact of the war with Iraq on consumer confidence is concerned. If we look only at the monthly data, it appears that employee confidence continued to increase from March (59) to April (67). In comparing the pre-war level of 47 to the start-of-the-war level of 72, however, it's clear that employee confidence peaked in late March and eased in April. If the same proves to be true of confidence among consumers in general, then recent reports may overstate the positive trend in consumer confidence.

This finding may be more important for the current "jobs recession" than it has been for past recessions. Normally, economists believe that unemployment is a lagging indicator of future economic activity. However, given the employment trend of the past few years, the availability of jobs may be an important indicator of future consumer and employee confidence. In this context, conditions in the job market may be a key determinant of whether consumers will continue to spend in the months ahead, particularly on major purchases.

*Results are based on telephone interviews with 657 adults who are employed with non-governmental, for-profit companies having five or more employees, aged 18 and older, conducted April 7-9, 2003, and April 14-16, 2003. For results based on the total sample, one can say with 95% confidence that the maximum margin of sampling error is ±4%. For March results based on the pre-war and after the war started samples, one can say with 95% confidence that the maximum margin of sampling error is ±6%.

**U.S. Labor Department