Monday, October 01, 2007

Recession in the Cards?

The polls are closed and the votes are in: 56% of readers who responded to my latest poll voted that the economy will not be going into recession. However a large minority of 44% thinks that something is about to hit the fan.

Regardless of your own personal opinion, I think this survey shows that people that care about personal finance, and hence read personal finance blogs, are not feeling too confident about the state of the economy right now. The problem is that the economy is sort of a self fulfilling prophecy: if people feel that the economy is doing well and that they are on sound financial footing, they spend more, which actually boosts economic activity. On the flip side, if people feel that the economy is at risk for a recession, they may preemptively cut their spending to prepare for the bad times, thereby reducing economic activity and tipping the economy over the edge and into recession. If a large segment of the population think the economy is about to go into recession, chances for a recession increase.

One more interesting point about this poll. I ran this poll for the past two weeks, and have been following the way the votes were going from day one. Two weeks ago, the early votes that came in were pretty pessimistic, with most voters expecting a recession. When the Fed cut interest rates, there appeared to be a burst of optimism with positive votes quickly overtaking the nay sayers. In the past couple of days, a little bit of pessimism has returned to the vote. Of course, this survey is nowhere near scientific and no sane person can draw any conclusions from it, however I found the correlation between the votes and the Fed rate cut to be intriguing. It is either a co-incidence or an example of the type of change in investor psychology that the Fed wanted to create.

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