Given all the positive economic news of the first quarter, it is not surprising that many economic observers are raising the possibility of a much stronger-than-expected economy later this year, accompanied by a significant increase in inflation. They're probably right to worry about price inflation, but the strength of the recovery and its future course is another matter entirely.
Gallup/UBS "Index of Investor Optimism -- U.S." data for the first quarter of 2002 show that investor optimism has returned to levels above those of the first quarter of 2001, but remains below the levels of the fourth quarter of 2001. Data broken down by geographic region of the country -- East, Midwest, South and West (see charts below) -- show that this is consistent on a regional basis. The data also indicate that investor optimism in all regions and the nation as a whole has increased more along the economic dimension of the Index than the personal dimension -- meaning investors are increasingly optimistic about the economy as a whole, but aren't reporting significant improvements in their personal finances.
All of this suggests that the economic outlook for the remainder of 2002 depends on the realization of real improvements in economic conditions. Can the optimistic expectations of investors/consumers be fulfilled given the recent surge in oil prices, the concerns about accounting issues, the lack of profit improvements, and the lack of business capital spending? While investor/consumer optimism is often self-fulfilling -- or at least a precondition to recovery -- the present fragility of confidence among these two groups implies that current economic recovery may not be able to handle a major oil price shock. Clearly, business decision makers shoulc remain cautious in the near term until it is clear that we will avoid a double-dip recession in 2002.
Optimism Above Last Year's Levels
Two years ago, during the first quarter of 2000, the Gallup/UBS "Index of Investor Optimism -- U.S." stood at 165. Between the first quarter of 2000 and the third quarter of 2001, U.S. investor optimism plunged 98 points to 67. It has since risen to 109, but still has a long way to go before it reaches levels that signal a solid recovery has taken hold.
Significantly, the Index's largest increases have come along its economic dimension, which is currently at 31 -- up sharply from its third quarter 2001 level of zero and more than three times as high as its first quarter 2001 level of 9. While the personal dimension of the Index has also improved, it has recovered more slowly. Its current level of 78 is just above its first quarter of 2001 level of 76.
Optimism up From Last Year in All Regions
As illustrated in the graph above, in the first quarter of 2000, the Index stood at 165 in the eastern region of the United States -- the same level as the nation as a whole. The Index in the East then fell to 122 in the fourth quarter of 2000 and 76 in the first quarter of 2001. Following the Sept. 11 terrorist attacks, the Index in the East fell to 54, a net drop of 111 points since early 2000. Although this drop was 13 points more than the national average, it was less than many observers might have expected given the events in New York City. Investor optimism in the East improved to 77 in the fourth quarter of 2001 and 110 in first quarter of 2002, back to the national average.
In the East, as in each of the other three regions, the biggest improvements in investor optimism have come along the economic dimension.
Two years ago, the Index stood at 154 in the Midwest. By the end of the third quarter of 2001, and after the Sept. 11 attacks, Midwestern investor optimism had dropped to 54 -- the same level as in the East. During the fourth quarter of 2001, investor optimism in the Midwest improved sharply to 92, and increased another 13 points to 105 in the first quarter of 2002.
Investor optimism in the South stood at 170 in the first quarter of 2002, and had fallen to 93 by late September 2001 -- a number substantially above the national average at that time. By the fourth quarter of 2001, investor optimism in the South had improved modestly to 99, and it reached 112 in the first quarter of 2002 -- higher than was found in any of the other three regions.
Two years ago, investor optimism stood at 171 in the West -- the highest of the four regions at that time. By the third quarter of 2001, the Index in the West had fallen drastically to 60. During the fourth quarter of 2001, it had increased 10 points to 70, and in 2002 it surged another 39 points to 109.
*Results for the Gallup/UBS "Index of Investor Optimism -- U.S." are based on monthly interviews with about 1,000 U.S. investors, aged 18 and older. For results based on each of these samples, one can say with 95% confidence that the maximum error attributable to sampling and other random effects is ±3%. 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.
