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The New "R" Word: Recovery

by Dennis Jacobe, PhD
Gallup Chief Economist

Many U.S. and EU investors expect better returns even as they say recovery will take time

There is plenty of new economic data to suggest that the U.S. recession of 2001 has come to an end. Even the preliminary gross domestic product (GDP) number for the fourth quarter was slightly positive. Add to the new data the Federal Reserve's decision to maintain current interest rates as a result of improving economic conditions, and it becomes clear that the general consensus is that the recession is over.

For that matter, more investors describe current economic conditions in both the U.S. and Europe as an economic "slowdown" than as a "recession."* (See table below.) In this regard, many investors have been ahead of the economists in declaring the recession over.

"How would you describe current economic conditions in the U.S./Europe today?"

  Recession Slowdown Recovery Expansion
Jan. 2002 29% 42% 26% 3%
Nov. 2001 33% 54% 8% 4%
Oct. 2001 27% 59% 10% 3%
Aug. 2001 8% 64% 17% 9%
Jan. 2002 11% 43% 33% 10%

Of course, the key question for business decision makers is when the "recovery" begins, not when the recession or slowdown ends. In this regard, investors seem somewhat less optimistic than many economic prognosticators. Most investors say that it will take more than six months before the U.S. and European economies are on their way to economic recovery. (See table below.) In part, this may be a perceptual difference. The overall signs of recovery may appear in the economic data some time before investors and the general public begin to experience the benefits of an economic upturn in their daily lives.

"How long do you think it will be before the U.S./Europe is on the way to an economic recovery?"

  Within 6 Months 6 Months to One Year One to Two Years Longer
Jan. 2002 25% 37% 15% 22%
Nov. 2001 18% 37% 22% 21%
Oct. 2001 20% 37% 20% 22%
Aug. 2001 11% 30% 20% 36%
Jan. 2002 10% 32% 28% 27%

On the other hand, it may be that many investors see the economy leveling off and remaining weak -- not shrinking, but still in a slowdown -- for many months to come. Many economists would describe this as a "U-shaped" recovery. Investors and consumers might reasonably perceive it to be a continuation of the slowdown.

In this regard, we can see how optimistic investor or consumer spending might carry the economy forward with slight economic growth until business capital spending and renewed profits provide the real impetus for renewed growth. The trick will be maintaining the current optimism even as the real economy stagnates.

Whatever the shape and timing of the economic recovery, investors expect their investment returns to be much better in 2002. The rates of return expected by most investors continued to increase in both the U.S. and Europe in January. Still, these expectations have not returned to the incredible levels of the past, nor those being suggested by some on Wall Street who anticipate a so-called "V-shaped" recovery.

Still, Investors Look for Better Returns This Year

As U.S. investors look forward to 2002, they expect to get much better rates of return than they did last year. On average, they expect to obtain a 10.2% average return on their portfolios over the next 12 months. This is a fairly optimistic outlook, considering that U.S. investors received virtually no return from their investments last year. Even more importantly, these expectations are far higher than what U.S. investors expected in December 2001, when they said they anticipated obtaining an 8.1% average rate of return on their portfolios in 2002.

European investors also look forward to higher rates of return in 2002,expecting an 8.7% average return over the next 12 months. European investors are less optimistic than are their U.S. counterparts, but still more optimistic than they were a month ago. In December 2001, EU5 investors anticipated obtaining a 7.9% average rate of return on their portfolios.

While investors in the U.S. and Europe think the economic recovery will take some time, they anticipate far better portfolio returns in the year ahead.

* Results are based on interviews with 1,001 U.S. investors, aged 18+, conducted Jan. 1-15, 2002, and approximately 200 investors each in France, Germany, Great Britain, Italy, and Spain conducted Jan. 2-22, 2002.


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