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Recovery: Real or Illusion?

by Dennis Jacobe

Based on the positive economic data during the first half of this year, many economists are projecting continued economic recovery during the last half of 2002. On the other hand, as Federal Reserve Chairman Alan Greenspan noted in his testimony to Congress' Joint Economic Committee last month, business executives are much less optimistic about the economic outlook than economists are. Executives remain wary because they aren't seeing "recovery"-type profits, nor are they seeing increased capital spending often associated with a recovery.

So what will happen in the second half of 2002? Will the recovery continue or falter?

New Gallup/UBS Index of Investor Optimism -- U.S. poll data (May 1-16)* show that overall U.S. investor optimism in May (90) is essentially unchanged from April (89). This leaves overall investor optimism slightly higher than it was in October 2001 and exactly the same as it was a year ago (90 in May 2001). Even more importantly, optimism among substantial investors -- those with $100,000 or more of investable assets -- is 101 in May, also the same as it was in May 2001.

Of course, there are a number of good reasons for investors to be concerned about the future, ranging from accounting concerns to the potential for terrorist attacks (see "Has the Time Come for Real Reform?" in Related Items). But whatever the reasons for it, investors' lack of optimism places the current economic outlook at about the same place it was a year ago, and leads me to agree with those business executives who do not see the economy improving dramatically in the second half of this year. If the economy persistently fails to live up to many people's expectations -- i.e., if consumers begin to view the recovery as more illusionary than real -- investor/consumer optimism could sink to even lower levels, therefore clouding prospects for early 2003.

Negative Wealth Effect

As already noted, overall U.S. investor optimism remained unchanged in May. Of even more concern, however, is the fact that the Personal Dimension of the Index of Investor Optimism -- U.S. remains at very low levels. The Personal Dimension is now at 67, almost the same as in April (66), its lowest point since September 2001 (61). This level is also substantially lower than it was at this time last year (78 in May 2001). Arguably, this means that investors as a whole are feeling a lot less wealthy right now than they did a year ago. This could mean in turn that the so-called "wealth effect" that had such a positive impact on the economy of the 1990s may end up having a significantly negative impact on consumption and economic activity in the second half of 2002.

Optimism Drops Among Substantial Investors

Overall substantial investor optimism fell from 111 in April to 101 in May, putting it close to its October 2001 level (98). The Personal Dimension for substantial investors declined from 79 in April to 75 in May -- virtually tied with February (74), which was its lowest level since September 2001 (61). The Economic Dimension for substantial investors also declined from 32 in April to 26 in May.

In sum, the two most predictive aspects of the Index of Investor Optimism -- U.S. -- the overall Personal Dimension and substantial investor optimism -- point to a weaker-than-expected economy during the third quarter of 2002.

*These results are based on telephone interviews with a randomly selected national sample of 1,002 U.S. investors, aged 18 and older, conducted May 1-16, 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%. 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/6103/Recovery-Real-Illusion.aspx
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