skip to main content
Most Consumers Say Economy Getting Worse

Most Consumers Say Economy Getting Worse

by Dennis Jacobe

PRINCETON, NJ -- Last week, Federal Reserve Board Chairman Ben Bernanke signaled a willingness to act in response to deteriorating economic conditions. New Gallup Poll economic data suggest that this avowed willingness to lower interest rates at the next Federal Open Market Committee (FOMC) meeting is not only warranted but actually overdue.

Consumer Expectations Back Near Historic Lows

New Gallup Poll data, from a Jan. 4-6 poll, show only 15% of U.S. consumers saying current economic conditions are getting better while 77% say they are getting worse. Consumer expectations have thus returned to the historic low they hit two months ago, when only 13% said economic conditions were getting better and 78% said they were getting worse.

Consumer pessimism about the future of the economy is now more widespread than it was in March 2003 -- just prior to the beginning of the war with Iraq -- when 23% of consumers said the economy was getting better and 67% said it was getting worse. Similarly, consumers are more widely pessimistic now than they were in September 2001 -- just prior to 9/11 -- when 19% said economic conditions were getting better and 70% said they were getting worse.

Can the Fed Change the Current Consumer Psychology?

In the past, a change in Fed policy has generally had a significant impact on consumer psychology, but it is not clear that a cut in interest rates can cure the current downturn in U.S. consumer psychology. Lower rates may stimulate an increase in mortgage refinancing applications as well as all other consumer loan applications. The problem is that the current consumer credit crunch is not the result of high interest rates but of tighter underwriting standards. As a result, it is not clear that lower interest rates will help the housing market and/or the auto market.

On the other hand, lower rates could also increase the downward pressure on the U.S. dollar. As a result, lower rates might actually end up exacerbating the surge in food and energy prices, rather than quelling it.

Given the downward momentum of the economy, declining business/consumer optimism, the relatively reduced impact of monetary policy in the current economic environment, and the fact that the Fed is already late to act, it is going to take a lot to change the current consumer psychology. In this regard, even a ½-point cut in rates at the next FOMC may not be enough. If the Fed wants to significantly affect U.S. consumer expectations at this point, it probably needs to cut rates by ½ point immediately -- or by a full point if it waits for the FOMC meeting at the end of this month.

Survey Methods

Results are based on telephone interviews with 1,023 national adults, aged 18 and older, conducted Jan. 4-6, 2008. For results based on the total sample of national adults, one can say with 95% confidence that the maximum 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.

Gallup World Headquarters, 901 F Street, Washington, D.C., 20001, U.S.A
+1 202.715.3030