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Investor Optimism Plunges to New Low in February

Investor Optimism Plunges to New Low in February

Consumers give current economic conditions weakest rating since November 1993

by Dennis Jacobe

GALLUP NEWS SERVICE

Investor optimism plummeted to a record low in February, according to the Index of Investor Optimism -- a joint effort of UBS and The Gallup Organization. The Index is now at 9 -- down 29 points from last month's 38, and its lowest point since its inception in October 1996. The previous low for the Index was 29 in October of last year, while its high was 178 in January 2000.

According to the latest Gallup Poll (conducted Feb. 17-19), the general public shares investor concerns about the condition of the economy and its direction. Only 18% of the public rates current economic conditions as good or excellent while 34% rate them as poor. This is the weakest rating for the economy since November 1993, when 17% of the public rated current economic conditions as good or excellent and 33% rated them as poor. At the same time, nearly two out of three consumers (63%) say economic conditions are getting worse -- more than twice as many as say conditions are getting better (26%).

Overall Investor Optimism Plunges

Overall investor optimism has fallen steadily over the past year. In March 2002, it was at 121. In April and May, the Index fell to 89 and 90, respectively. In June, it fell again to 72 before plunging to a 6-year low of 46 in July. In August and September, the overall Index increased slightly to 52 and 60 before plunging to another new low of 29 in October. The Index increased to 41 in November and then to 52 in December. It dropped to 38 in January 2003 before plunging to its current new low.

The drop in the Index was driven by declines in both its personal and economic dimensions. The personal dimension hit a new all-time low of 30 in February. The economic dimension also hit a record low of –21 in February, indicating that investors are now substantially pessimistic about the U.S. economy's prospects over the next 6 months. Importantly, investors are not only less optimistic about the prospects for the stock market in the months ahead, but they are also increasingly pessimistic about future economic growth and the unemployment rate.

Index of Investor Optimism – U.S.
January 2000 – February 2003

Consumers Rate Current Economic Conditions as Weak

One out of three Americans (34%) rate current economic conditions as poor -- almost twice as many as those rating them as excellent or good (18%). This differential (excellent/good minus poor) of –16 percentage points is far below the +12 differential of a year ago (Feb. 4-6, 2002). It is also the largest negative differential since Nov. 2-4, 1993, when it was also –16 percentage points (excellent/good of 17 minus poor of 33).

Rating of Current Economic Conditions

Consumers Also Say Conditions Are Getting Worse

In February, 63% of Americans tell Gallup they think economic conditions in the country as a whole are getting worse -- the highest percentage since a September 2001 poll (taken just before the terrorist attacks), when 70% of the public gave that assessment of the economy's future direction.

With the exception of that September measurement and several polls from late winter and spring 2001, the last time consumers were as negative as they are right now on the future direction of the economy was in August 1992. At that point, 65% of the public said economic conditions were getting worse while 24% said conditions were getting better.

Economic Conditions Getting Better
or Getting Worse?

Key Points

Reports from last week's meeting of the Business Council of chief executives in Boca Raton, Florida have many CEOs claiming that consumer spending will stay stable in the months ahead and pointing to consumer purchasing power as a reason for optimism. Consumers' willingness to continue spending as the economy has weakened during recent years has been a key underpinning of the U.S. economy.

Will the consumer keep spending even as investor optimism and consumer confidence plummet? This may be possible, especially if the decline in investor/consumer sentiment is short-lived. And, consumers will have to spend more in the months ahead given increasing energy and gas prices. Still, history is not on the side of CEOs who believe public perceptions are transitory and do not matter.

Econometric analysis suggests that the Index of Investor Optimism is a leading economic indicator. The broad-based nature of the decline in this indicator during February and its long-term downward trend combines with the weakness being shown in Gallup's other economic measures to suggest that the economy is getting substantially weaker. In fact, current public perceptions are looking much like those of the early 1990s -- the last time the U.S. economy experienced a significant recession.

Survey Methods

Investor results are based on telephone interviews with 1,000 investors, aged 18+, conducted Feb. 1-16, 2003. Consumer results are based on telephone interviews with 1,002 national adults, aged 18+, conducted Feb. 17-19, 2003. For results based on these total samples, one can say with 95% confidence that the margin of sampling error 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.


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