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The Gap Between Sentiment and Certainty Is ‘Stunning’
By Paul Vigna
The gap between “hard” and “soft” data measuring the U.S. economy has never been more disparate, according to a new report from Morgan Stanley, which means investors who have been putting too much weight on the soft data may be in for a rude awakening in a matter of weeks.
This morning offered another example of this. The Conference Board reported that its consumer-confidence index surged to 125.6 in March, its highest level since December 2000.
That was well above last month’s already elevated reading of 114.8, and even higher than the 113.8 figure that economists had been expecting. The elevated optimism “suggests the possibility of some upside to the prospects for economic growth in the coming months,” the firm said.
That’s typical of the way the soft data has been running lately: far above expectations, and pointing to an economy that should be growing sharply. The hard data, on the other hand, is coming in pretty much as expected, and pointing to an economy that is stuck in its familiar, unsatisfying rut. The following table from Morgan Stanley makes the divergence starkly obvious:
That’s a measure of the components of the Bloomberg ECO U.S. Surprise Index, which calculates how closely data match up to forecasts. The higher the reading, the bigger the margin by which data are beating expectations.
“The divergence is stunning,” wrote Morgan Stanley economist Ellen Zentner. “Upside surprises appear to be completely driven by the soft data while hard data are simply coming in about as expected.”
“Soft” data comprises various poll-driven reports, like consumer confidence and business surveys. These have been been running strong for several months now. Consumer confidence as measured by the University of Michigan, for example, hit a decade high in January. It slipped in February, but remains up strongly from a year ago. Business surveys, too, have been hitting multi-year highs.
Basically, sentiment has been surging as the surveys have more or less reflected the optimism of Trump supporters and people expecting a purportedly progrowth administration to boost the economy. The problem is that so far the hard data have not supported that optimism.
That “hard” data comprises economic reports that measure actual activity, like retail sales, durable-goods orders and the like. These have not rebounded nearly as much as the soft data. Retail sales, housing sales, business spending, these have all been running well behind the soft data.
One major issue here is that depending upon how you construct your economic model, the divergence between the two can produce wildly different projections for the U.S. economy. The Federal Reserve Bank of New York’s model, which gives more weight to the soft data, is currently projecting a 3% gross domestic product “print” in the first quarter. By contrast, the Federal Reserve Bank of Atlanta’s model, which incorporates soft data but to a lesser degree, is projecting only a 1% print. Morgan Stanley, too, expects 1% GDP when the Commerce Department releases its initial first-quarter reading on April 28.
The consensus estimate on the Street, 1.9% according to the latest WSJ survey, isn’t as bullish as the New York Fed. But that’s just the average, meaning there are plenty of people on the Street who are are bullish as the New York Fed. Some are even more so—the high estimate in the survey is 3.6%. If the soft data is overstating the actual picture in the economy, there will be plenty of disappointment to go around.
Morgan Stanley does expect the second quarter to produce a rebound, something on the order of 3%, as some “transitory” issues like inventory levels get worked through the economy.
Depending upon your point of view, Ms. Zentner said, you might read that as the hard data coming around to the soft data’s read on the economy. “But from an economist’s point of view, smoothing through the volatility simply looks like the outlook for around 2% growth remains intact,” she writes.
In other words, the hard data on the economy is still looking far too soft.