"It's the economy, stupid." So said James Carville, a strategist for Bill Clinton, as George H.W. Bush's popularity tanked during the recession then prevailing. The economy and jobs are main contributors to healthy consumer sentiment, as full employment and a good stock market tend to make people feel good about themselves.
It shouldn't come as a surprise, then, that Americans are now more optimistic about their personal finances than they have been in 16 years -- so says a new poll by Gallup. That's a significant milestone. Here are the key takeaways from Gallup's recent poll, and what to watch for if this optimism continues.
More Americans are feeling good about themselves, but is that a reason for concern? Image source: Getty Images.
Rosy outlook
Gallup's January telephone interviews of just over a thousand adults across the U.S. found Americans have a rosy outlook about their finances, both now and when asked about next year. Not only did 69% say they expect to be in a better financial position "at this time next year" -- a level of optimism not seen in 16 years -- but that's also only slightly less than the all-time high reported in the survey of March 1998, when 71% said they expected to be better off the following year. Americans are feeling good (or at least those surveyed are).
The wealth effect
Truth be told, it's hard to read too much into the survey -- Americans are a fickle lot, and we tend to be the most optimistic right around stock market peaks. The Gallup poll found the majority of survey respondents reporting they were "better off" financially just before the 2000 stock market crash, and in the year prior to the 2008 crash; the majority of survey respondents then said in the following year they were "worse off." It's amazing how fast things can change.
For now, the trend is clearly in one direction: Since 2014, an increasing number of respondents have said they were "better off" financially.
Partisan bias?
One interesting tidbit is the number of Republicans who believe they're better off today than a year ago. Sixty-eight percent of Republicans said they were "better off" now, and only 10% reported "worse off" (the rest reported no change). Democrats didn't quite see it that way -- 37% of Democrats said they were "worse off" financially this year than a year ago, up from 32%. Faith in one's party goes a long way.
It should be noted that both Democrats and Republicans have been more positive about the future: "Majorities from both parties said they expected to be better off in the coming year in both the pre-Trump-election polls and the post-Trump-inauguration ones."
Implications
Consumer sentiment is an important factor in a country's GDP (gross domestic product). If consumers are optimistic about their finances, they may be more prone to take out a mortgage loan, buy a car, or spend money some other way, all of which keeps the economy going. This should also bode well for the stock market.
However, things can change fast. If Americans continue to spend because they're feeling confident about the year ahead, it could cause the economy to heat up too fast, and the Federal Reserve might step in to slow things down by raising interest rates. A spike in interest rates can negatively affect the economy and investors in several ways. Companies may be less interested in taking on new debt to expand, given the higher costs of borrowing. They also may put the brakes on hiring until they see how things shake out. Consumers may be less likely to spend if they're unsure of their future job prospects. Add this all up, and investors may anticipate an economic slowdown, which won't help the U.S. stock market.
I think the lesson is: Don't get too caught up in the optimism. Take the contrarian view. When everyone around you is feeling good, that might be a time to be a little more cautious, as a bubble might be forming. Recognize that no trend goes on forever, in either direction -- optimism or pessimism.
Instead, use the good times to shore up your finances; build up an emergency reserve fund and pay down any debt. You may also want to avoid overspending on commitments that rely on future income to pay off, like buying a house larger than you can afford -- that didn't end well for a lot of people in 2008.
Incidentally, in 2007, there was an extreme spike in the number of Gallup's respondents reporting they were "better off" than a year ago -- then a sharp reversal the following year. Let's hope history doesn't repeat itself.