Byline: Dennis Jacobe

Synopsis: New Gallup Polls show consumers rating current economic conditions as the best in six years, investor optimism at its highest point in three years, and consumer credit perceptions and small-business-owner optimism at new highs. So why do so many consumers say

PRINCETON, NJ -- New Gallup Poll economic data show that consumers, investors, and small-business owners are now more positive about current economic conditions than they have been in years. For that matter, what's not to like? Gas prices at the pump are lower than they were a year ago. The Fed appears to be on automatic pilot, keeping short-term interest rates stable and allowing long-term rates to slowly increase, thus flattening the yield curve. The economy slowed in the second half of 2006, but the jobs situation remains reasonably positive and average employee earnings are actually showing some improvement.

Still, consumer perceptions of the direction of the U.S. economy remain highly negative. The question is, "Why?"

Investor Optimism Highest in Three Years

Investor optimism soared to its highest level since 2004, with the UBS/Gallup Index of Investor Optimism reaching 103 for January 2007. The Index jumped 13 points from last month's reading, marking only the fifth time the Index has been above 100 since December 2000. The Index poll is conducted monthly and had a baseline score of 124 when it was established in October 1996.

Small-Business Owners' Optimism Reaches New High

Small-business owners' optimism reached a new high in December, as the Wells Fargo/Gallup Small Business Index attained a record-high score of 114. This is up four points from September, and is the highest level for the Index since its inception in August 2003, when it stood at 69.

The Personal Credit Index Also Hits New High

The Experian/Gallup Personal Credit Index (PCI) reached 105 in January 2007 -- up 22 points over the two months since November 2006 and indicating that consumer credit-market perceptions are more positive than they have been at any time in the past two years. The PCI is now at its highest level since its inception in February 2005, when it was benchmarked at 100.

Consumers Rate Current Economic Conditions as Best in Six Years

In a Gallup Poll conducted Jan. 15-18, 52% of consumers rated current U.S. economic conditions as good or excellent -- up from 42% in December and the highest consumer rating of current economic conditions since January 2001, when 67% of consumers gave the economy a "good" or "excellent" rating.

Still, the Majority of Consumers Say Economic Conditions Are Getting Worse

In sharp contrast to all of the optimism about the current economy among consumers, investors, and small-business owners, when asked in January 2007 about the U.S. economy's direction, 53% of consumers say economic conditions are getting worse, not better. This is essentially the same as the 54% who felt this way a month ago and the 52% from a year ago.

Uncertainty Breeds Negative Expectations

In part, consumer expectations are probably being negatively influenced by a halo effect associated with the war in Iraq, which is also a reason for George W. Bush's low job approval rating and low levels of satisfaction with the state of the nation. General unhappiness about the course of the war may not only taint overall consumer perceptions but also create considerable uncertainty. Add to this consumer concerns that gas prices at the pump may escalate as the summer driving season approaches -- as they did last year -- and consumers have reason to worry about how long current economic conditions can be maintained.

Of course, consumers also have reason to be concerned about whether the Fed can actually achieve an economic "soft landing" in 2007. Residential real estate conditions continue to deteriorate. Major corporations continue to focus on cost-cutting and job outsourcing.

So, while surging optimism on Wall Street seems to indicate that today's economic uncertainties are not breeding negative economic expectations, pessimism on Main Street about the direction of the U.S. economy suggests just the opposite.

Survey Methods

Results are based on telephone interviews with 1,018 national adults, aged 18 and older, conducted Jan. 15-18, 2007. 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.

Results for the Experian/Gallup Personal Credit Index poll are based on telephone interviews with 1,001 adults, aged 18 and older, conducted Jan. 2-8, 2007. For results based on the total sample of adults, one can say with 95% confidence that the maximum margin of sampling error is 3 percentage points.

Results for the UBS/Gallup Index of Investor Optimism are based on telephone interviews with 802 investors, aged 18 and older, conducted Jan. 2-14, 2007. For results based on the total sample of investors, one can say with 95% confidence that the maximum margin of sampling error is 4 percentage points.

Results for the Wells Fargo/Gallup Small Business Index are based on telephone interviews with 600 small-business owners, conducted Nov. 9-29, 2006. For results based on the total sample of small-business owners, one can say with 95% confidence that the maximum margin of sampling error is 4 percentage points.