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Majority of Investors Believe U.S. Economy "in a Slowdown"
Gallup
by Dennis Jacobe
October 24, 2005

GALLUP NEWS SERVICE

PRINCETON, NJ -- Speaking before the Metropolitan Trenton (N.J.) African American Chamber of Commerce on Oct. 18, Federal Reserve Vice Chairman Roger Ferguson put forth his view of the U.S. economy: "To jump right to the bottom line, I believe that the outlook for the economy remains solid despite the devastating blows delivered to the Gulf Coast by Hurricanes Katrina and Rita."

In sharp contrast, the majority of U.S. investors describe the current economy as being in a "slowdown" or a "recession" as opposed to being in a "recovery" or a "sustained expansion," according to the October UBS/Gallup Index of Investor Optimism.

Why is there such a disconnect between the perceptions of economic policymakers and those of most investors concerning the U.S. economy's condition? The answer may lie in their differing reactions to today's energy prices.

Assessing Current Economic Conditions

Half of U.S. investors say the current economy is in a slowdown and another 14% describe it as being in a recession. On the other hand, 16% say the economy is in a recovery, while 17% say it is in a sustained expansion.

The percentage of investors describing the economy as being in a slowdown is currently at its highest level since about four years ago, following the terrorist attacks of Sept. 11.

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Energy Prices Hurting a Lot

Given oil prices at more than $60 a barrel and the recent gas prices at the pump, it is not surprising that energy prices top the list of investor worries in October 2005. In fact, 8 in 10 investors say the price of energy is hurting the current investment climate a lot. This is up nine percentage points from July and is its highest level since measurement of these perceptions began in March 2004.

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Investors Have Many Additional Worries

Second among investor worries -- behind energy prices -- is the outsourcing of jobs to foreign countries, with 64% of investors saying this activity is hurting the current investment climate "a lot." Concerns over the federal budget deficit are next (58% of investors say it is hurting the investment climate a lot), followed by 55% who point to the economic impact of Hurricanes Katrina, Rita, and other storms this season.

Next is the current situation in Iraq (46%), the issue of questionable accounting practices in business (44%), the potential for a housing or real estate crash in some local markets (33%), and inflation (also 33%).

Ninth on the list among the 11 potential sources of concern included in the poll is the threat of more terrorist attacks, with 31% of investors saying this is hurting the investment climate a lot; 27% say the same about the value of the dollar against other currencies. Only 14% of investors say the current level of interest rates is hurting the investment climate a lot.

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Investor Optimism Remains Weak

Overall investor optimism rebounded by 13 points in October, reaching 47 -- up from 34 in September. However, investor optimism remains at its lowest level -- excluding September -- of the past two years.

The Personal Dimension is at 55 -- up from 48 in September and about the same as the 54 in August. The Economic Dimension also improved, from –14 in September to –8 in October. Still, investors as a whole remain pessimistic about the direction of the U.S. economy.

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Divergence in Views of Fed Policy

On Oct. 17, Fed Chairman Alan Greenspan noted in his speech before a Japanese business group: "The effect of the current surge in oil prices, though noticeable, is likely to prove significantly less consequential to economic growth and inflation than the surge in the 1970s." This statement is important not only because it provides the context of economic history for current energy prices, but also for the overall perspective it reflects.

As with the Oct. 18 statement of Vice Chairman Ferguson, Greenspan's statement provides a long-term analytical view of the potential impact of energy prices on the economy. In turn, this helps explain why Ferguson ended his presentation with the following: "For now I believe that our policy of removing monetary accommodation at a 'measured' pace is most likely to promote our broader objectives of price stability and maximum sustainable economic growth." He might have added that one of the lessons of the 1970s and early 1980s is that lowering interest rates in an oil price shock can easily lead to double-digit inflation, double-digit interest rates, and economic stagnation.

The problem is that many of today's consumers and investors did not experience the challenges of the 1970s or even those of the early 1980s. Even fewer seem to remember runaway inflation, double-digit mortgage rates, and the severe recessions of 1973-75 and 1980-82. As a result, an energy price-driven "slowdown" or "recession" -- even one that is relatively mild, from a 1970s perspective -- may be considered significant by the large majority of today's consumers and investors.

This may be why so many investors seem to see current economic conditions so differently than Greenspan and Ferguson do. While the Fed, viewing the economy through the prism of the 1970s, sees inflation as the major danger associated with today's much higher oil prices, inflation remains relatively low -- tied for 7th out of the 11 items polled -- on the current list of investor worries. In turn, this probably explains why 43% of investors disapproved of the Fed's recent interest rate increases (50% approved), and why 8 in 10 investors say the Fed should leave interest rates unchanged or act to reduce them at its next meeting. Many investors are clearly more concerned that the economy is too weak to handle further interest rate increases at this time and less concerned about the potential for inflation than Fed policymakers are.

While recent declines in gas prices at the pump may have helped create the October bounce in investor optimism and could do the same for consumer confidence in the near term, barring a continued and sharp drop in gas prices in the weeks ahead, it is hard to see this coming holiday sales season as a good one for the many retailers serving middle- and lower-income Americans. Given the public's lack of experience with -- or even memory of -- the 1970s, it seems likely that investors will not be the only Americans saying the Fed should stop increasing or should even decrease interest rates in the months ahead.

Survey Methods

Results for the Index of Investor Optimism poll are based on telephone interviews with 804 investors, aged 18 and older, conducted Oct. 1–16, 2005. 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. 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.

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