Recession Fears Ease As Gas Prices Fall, Stocks Rally
With gas prices falling and the Dow Jones rallying, Americans have turned slightly bullish about the outlook for their personal finances, the new IBD/TIPP Poll finds. The share of Americans who think the U.S. economy is in a recession eased to 55% from 58% last month and 61% in October.
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The overall IBD/TIPP Economic Optimism Index perked up 2.5 points to a still-gloomy 42.9 in December. The index has been stuck in pessimistic territory, below the 50 neutral level, for 16 straight months, but it’s now 4.8 points above the 11-year low matched in August.
The Economic Optimism Index reached its highest level since September’s 6.6-point surge that came as President Joe Biden moved to forgive up to $20,000 per borrower in federal college loans. The mood change has turned less dour over the past month, even as an appeals court blocked Biden’s student-loan giveaway, which now faces an uphill battle before the Supreme Court in early 2023.
Doubts that the program will ever take effect may explain why Biden’s job approval rating slipped further underwater in the new IBD/TIPP Poll.
Perceptions about the state of the U.S. economy are colored by political leanings, so the midterm elections, which followed November’s IBD/TIPP Poll, may have contributed to the better mood, especially among Republicans.
Following the GOP takeover of the House, the Economic Optimism Index among Republicans rose 3 points to 27.7, the highest since February. The index rose 2.2 points to 36.8 among independents and 1.4 points to 58.7 among Democrats.
Financial Stress Eases
The IBD/TIPP Financial-Related Stress Index eased for a second straight month, falling 2.5 points to 65.3. October’s 69.5 reading was just below April 2020’s 69.8 record high in polling going back to December 2007. Readings above 50 mean financial stress is rising.
Job growth remained solid in November as employers added 263,000 workers, while annual wage growth is a strong 5.1%. Yet just 22% of adults say their wages have kept pace with inflation, though that edged up from 20% in November. Meanwhile, 87% of Americans are concerned about the path of inflation over the next 12 months, down one point from a month ago.
A steady 32% of adults are concerned about job loss in their household, but that’s down from 38% in October and 34% in September.
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U.S. Economic Optimism Index Components
The IBD/TIPP Economic Optimism Index is a composite of three major subindexes. They track views of near-term prospects for the U.S. economy and personal finances, along with support for government economic policies.
In December, the six-month outlook for the U.S. economy rose 3.4 points to a still-downbeat 37.7. In June, this subindex got as low as 30.6, the lowest level since July 2008, when the country was mired in a recession.
The personal finances subindex rose 1.8 points to 50.2, edging into optimistic territory for the first time since September. July’s 45.3 reading was the weakest in the history of the IBD/TIPP Economic Optimism Index dating back to February 2001. Views of personal finances had reached a bullish 59.7 in July 2021, before inflation took off.
The gauge of support for federal economic policies rose 2.1 points to 40.7. August’s 35.3 reading was the lowest level since January 2014. That gauge got as high as 56.4 in June 2021, after more rounds of stimulus checks and amid a big push for more expansive policies from President Biden. Now, however, stimulus has lapsed and the Federal Reserve is hiking interest rates to try and rein in the inflation to which stimulus contributed.
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Investors Turn Neutral On U.S. Economy
The U.S. Economic Optimism gauge climbed 2.3 points among investors to an even 50, right at the neutral level. IBD/TIPP counts as investors those respondents who say they have at least $10,000 in household-owned mutual funds or equities. The tentative exit from pessimistic territory comes as the latest Dow Jones rally stays alive, helped by easing inflation and the Fed’s downshift in the pace of rate hikes. A further half-point hike to a range of 4.25% is expected on Wednesday.
As of Monday’s close, the Dow Jones Industrial Average has rallied 18.4% from its bear-market low on Sept. 30 but remains 7.6% below its all-time closing high on Jan. 4. The S&P 500 is up 11.6% from its Oct. 12 low, but still 16.8% off its peak. The Nasdaq has climbed 8% since hitting bottom on Oct. 14 but is still 30.6% off its record high.
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Investors remain far more upbeat than noninvestors. Among noninvestors, the IBD/TIPP index rose 3.2 points to 39.4, still deeply pessimistic.
The December IBD/TIPP Poll reflects online surveys of 1,351 adults from Dec. 7-9. The results come with a credibility interval of +/- 2.8 points.
Please follow Jed Graham on Twitter @IBD_JGraham for coverage of economic policy and financial markets.
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