Sentiment is Soaring ... Will Hard Economic Data Follow?

Sentiment readings have been soaring post-election, with the possibility of tax cuts, regulation reforms, and infrastructure programs clearly getting people excited.

In fact, yesterday’s Conference Board index jumped to 125.6. That was the highest going all the way back to December 2000, just before the onset of the “Tech Wreck” recession which started in April 2001.

Not only that, but both the Present Situation Index and the Expectations Index increased sharply in March after strong gains in February.

As you can see in this chart, we’re hovering well above the long-term average. We’re also not seeing any evidence of the kind of general decline in consumer confidence that has signaled the approach of a recession in the past.

But at least so far, we also haven’t seen the confidence surge filter through to so-called “hard” economic data. That means things like retail sales, industrial production, and GDP growth.

As a result, we have a divergence in the GDP forecasts that competing regional Federal Reserve banks publish. The Atlanta Fed’s GDP model waits for hard data, then extrapolates a forecast from it, while the New York Fed’s GDP model takes sentiment surveys into higher consideration. The end result is diverging charts like this:

Again, it’s clear that post-election confidence is high, which is why the NY Fed predicts a GDP growth rate of 2.96% for the first quarter. But the hard data that we’ve seen has been mixed — with some good numbers, as well as some just “okay” numbers. That’s why the Atlanta Fed is expecting growth of only around 1%.

The question going forward is: “Will rising confidence translate into more purchasing actions by businesses and consumers?” Personally, I believe that when you have policy uncertainty or delays, it can cause mangers and decision makers to wait. That likely explains the divergence.

It’s not problematic, as long as policy change is coming. Since our administration is hard at work to make that happen, one way or another, I expect to see this temporary divergence right itself. But I’ll be watching closely in the weeks and months ahead, and I suggest you do too.

Best wishes,

Mandeep

Small Cap Edition, By Mandeep Rai, Senior Analyst Mandeep Rai has more than 15 years of investing experience, working as both a stock and credit analyst. At Weiss Ratings, he researches and evaluates financial and economic themes, and makes decisions on when to buy or sell specific shares for the Top Stocks Under $10 portfolio.