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Consumer Exuberance: Is It Irrational?

by Dennis Jacobe

There has been a lot of good economic news in the last couple of weeks -- so much, in fact, that it has eclipsed annoying concerns about things like "Enronitis" and the potential economic risks associated with increased fighting in Afghanistan and the Middle East. Strong retail sales figures and low unemployment claims in February led to optimism among economic forecasters, and Federal Reserve Chairman Alan Greenspan reported to Congress last Thursday that "an economic expansion is already well underway."

In this context, it is not surprising that the American consumer is more positive about the overall direction of the economy. Still, March Gallup Poll* economic data reveal that the consumer -- like Wall Street -- is showing exuberance about the economic outlook as the recent recession ends and signs of a recovery begin to materialize.

Expectations Are Surging

During the first week of March, 54% of Americans told Gallup that they think economic conditions are getting better as opposed to getting worse -- the highest percentage of consumers since August 2000. In the same poll, 56% (up from 43% in February) said they expect the stock market to go up a lot or a little in the next six months. And 61% (up from 51% in February) said they expect economic growth to go up a lot or a little during the next six months.

Current Expectations

Percentage "Going Up a Lot or a Little"

March
4-7, 2002

Feb
7-9, 2002

Jan
7-9, 2002

Dec
6-9, 2001

Nov
8-11, 2001

Oct
11-14, 2001

%

%

%

%

%

%

The Stock Market

56

43

53

51

52

46

Economic Growth

61

51

53

49

39

37

Unemployment

43

43

46

48

52

51

Too Much Exuberance?

When the economy and the markets were booming a few years ago, Greenspan used the highly controversial term "irrational exuberance" to describe a level of enthusiasm dominating Wall Street that he did not feel was justified by the strength of the underlying economy. In his testimony before the Senate Banking Committee last week (March 7), he did not use the same high-impact words, but instead warned that the "impetus to the growth of [economic] activity will be short-lived unless sustained increases in final demand kick in before the positive effects of the swing from inventory liquidation dissipate." He added, "… the broad contours of the present [economic] cycle have been, and will continue to be, driven by the evolution of corporate profits and capital investment." In other words, the rally can only be maintained if companies start to show profits to justify their higher prices.

For the average American, this means that it may be a little early to count on a roaring economic upturn in the months ahead. Today's "exuberance" may not be "irrational," but it might well be premature. Ironically, if consumer expectations are going to be met in the near term, then their assessment of current economic conditions is going to have to improve a lot in the months ahead. In this regard, business decision-makers should note that in March, only one out of three (34%) consumers rate current economic conditions as good or excellent. This is up from 28% in February -- a nice improvement, but still below the October 2001 level of 38%. Today's "exuberance" will be a lot more justifiable when these percentages rise back to the 60% to 70% range so common prior to last year's recession.

*These results are based on telephone interviews with a randomly selected national sample of 1,004 adults, age 18 and older, conducted March 4-7, 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 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.


Gallup https://news.gallup.com/poll/5449/Consumer-Exuberance-Irrational.aspx
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