Aug. 15 (Bloomberg) -- Americans are in a sour and pessimistic mood.

President George W. Bush's job approval rating is an unimpressive 42 percent, according to the latest Associated Press poll conducted by Ipsos Public Affairs. Attitudes are lousy about just about everything. Only 41 percent of Americans approve of the president's handling of the economy, the same poll shows.

These low ratings on the economy are consistent with other measures of consumer attitudes. For example, the University of Michigan's consumer sentiment index tracking expectations, the variable that academic economists have found most important for predicting consumption, is down from the start of the year. The index has been much stronger during similar booms in the past.

Over the years, negative political polls and consumer sentiment have moved hand-in-hand with bleak economic times. People turn on a president when their jobs are at risk.

But this time around, the economic data have been much more solid than the polls. The latest labor market readings suggest that job creation has been robust. Bond and stock markets have both been moving in directions consistent with bullish economic expectations.

Self-Fulfilling

There are only two possibilities. Either Americans see an economic reversal coming that markets have missed, or the data are fine and Americans are upset about something else.

I think it's the latter, and that something else, I submit, is Iraq.

Negative expectations about the economy can be self- fulfilling, so it's important to distinguish between the two possibilities. If Americans decide that times are bad, they will batten down the hatches and hold back their big-ticket purchases. When those drop, everything else can go too. And surging oil prices certainly suggest there are risks out there. Maybe ordinary folks are on to something.

The seriousness of this issue was apparent last week, when President Bush and his economic team traipsed before the press in Crawford, Texas, and crowed about the great data. ``The economy is growing faster than any other major industrialized country,'' the president reminded listeners, ``Job growth is strong.''

Fuel, Health Insurance

If people really believed that, there would be no need for a public relations offensive. So why the bad mood?

There's been an endless stream of speculation. Al Hubbard, director of the president's National Economic Council, emphasized fuel prices. Ben Bernanke, chairman of the Council of Economic Advisors, alluded to the cost of health insurance.

These cannot be the most important factors. Fuel prices have been volatile over the past year, but sentiment has been down since January. Health-insurance costs have been skyrocketing in both good and bad years for a decade. Why should they show up in sentiment now more than in the past?

Another story that has figured prominently in the recent public discussion is about who benefits: Average citizens are negative about the president's handling of the economy because they haven't seen any tangible gains from its growth.

A leading proponent of this view is Jared Bernstein of the Economic Policy Institute. ``It's a pretty classic Wall Street- Main Street split,'' he recently told the Wall Street Journal. ``It comes down to the fact that the economy is doing great until you factor in the earnings of working families. Real wages have been stagnating.''

Striking Correlation

This argument doesn't hold up. For one thing, there have been many periods of weak real wage growth for those at the bottom, but few have produced sentiment data like we see today. Also, real wage growth has picked up. And since tax policy has increasingly given generous credits to the working poor, after-tax income for ordinary Americans has grown even more. Finally, consumption has been booming, an indication that folks have enough money to fill their shopping carts.

The explanation I favor is that the negative news about Iraq and the failure to stop the attacks in London have overwhelmed the good economic news. It's easy to assert that, but the fact is the data resoundingly support this view.

Sentiment Sideshow

While correlation is not causality, the strong common down trend during a period of economic expansion convincingly supports the view that the turmoil in Iraq is affecting answers to economic questions. It's hard to imagine the effect going the other way.

This might not be good news for the president, or for Republicans in general. The disorder in Iraq, no matter how good the cause, presents a serious challenge, and the next election is just a bit more than a year away.

The president may be powerless to change the mood about Iraq in the short run. If anything could be done to make things run more smoothly, it would have been done by now.

As for the polls on the economy, they are little more than a sideshow. They don't signal that poor people aren't keeping up, that oil prices are high, or that the economy is about to turn down. They are measuring political sentiment, not economic.

Last Updated: August 15, 2005 00:07 EDT