"Optimism index" suggests recession is here

Commentary: Was S&P downgrade the event survey foretold?
BOSTON (MarketWatch) — Investors don’t need more bad news right now, but, even before the S&P downgrade of U.S. sovereign debt late Friday, they seemed to be cognizant it was coming.

The Investors Business Daily Economic Optimism Index dropped by 13.5% from July to August, with its latest reading representing the lowest point in the index’s 10-year history. The August reading of 35.8 — down from 41.4 last month — is roughly 20% below both its 12-month average and the reading from December 2007, when the economy entered recession.

Not surprisingly, a reading that low suggests another recession is on the way.

The monthly polling started last weekend — before Congress had sorted out the debt-ceiling dilemma — and continued after an agreement was finished, but Raghavan Mayur, president of the unit of TechnoMetrica Market Intelligence that conducts IBD’s polling, said investors’ bad mood is about more than just one or two current events.

“The poll is a validation of the dark economic picture we’re all seeing,” Mayur said, speaking before S&P stripped the U.S. of its coveted AAA credit rating. “It may get better, but it’s not just going to jump up and look good again. … When there are big movements of five or six points, and historical lows on the optimism index, that has always said something. What it is saying right now is that the risks of a recession are elevated, that we’re either in one or about to be.”

Not only was IBD’s overall index at historic lows, but all three of its key components — the six-month economic outlook, the personal financial outlook and confidence in federal policies — are at historic lows. Every single demographic group polled, 21 in all, showed an increasing level of pessimism over the economic outlook.

IBD normally releases its index — which historically does a good job at foreshadowing the results of better-known sentiment indicators from the Conference Board and the University of Michigan — in the second week of each month, but it started and finished this polling early enough that it felt the results should be out before the weekend due to the market’s sensitive state, according to IBD editor Wes Mann.

— Chuck Jaffe