The Economy’s Confidence Game

High levels of confidence don’t jibe with a slow-growing U.S. economy. That can’t last.

By Justin Lahart



In the months since President Donald Trump was elected, consumer and business confidence have soared, but the economy has slowed. The split has rarely been so stark and, while optimists have been hoping the economy will soon catch up with sentiment, it is looking more likely that sentiment will roll over.

Following a string of weak sales, spending and production data, economists have cut their expectations of economic growth for the first quarter. Forecasters polled by Macroeconomic Advisers now expect Friday’s gross domestic product report will show the economy grew at a 0.9% annual rate in the first quarter. At the start of the year, they had penciled in growth of 2.1%.

Some of the apparent weakness in GDP is likely due to quirks in the data caused by factors such as unusual winter weather and a swing in business inventories. Still, the divergence between “hard data”—tangible measures such as car sales—and “soft data,” such as confidence and other survey-based measures, is unusual. Research firm Cornerstone Macro calculates that the confidence data would normally imply GDP growth of about 5%.

The bullish case is that newly optimistic consumers and business owners will soon start spending, boosting economic data. This is generally what happens when the economy is coming out of recession, with the hard data following the soft data higher.

But the economy isn’t coming out of a recession—the last one ended nearly eight years ago. Instead, the country has experienced a long period of rising employment and disappointing but steady growth. The pent-up demand that exists in the aftermath of a downturn isn’t there. And the mere possibility of lower taxes and faster growth hasn’t changed the caution that consumers and businesses learned since the financial crisis.

The clock is ticking says Bank of the West economist Scott Anderson. Historically, when the hard data doesn’t pick up within a month or two of the move higher in the soft data, the soft data tends to tumble.

There are signs the souring in the soft data has begun. Last week, regional manufacturing surveys from the Federal Reserve Banks of Philadelphia and New York registered slowing activity. So did U.S. private-sector surveys conducted by Markit.

Barring proof that the White House and Republican-controlled Congress are about to deliver on tax cuts and stimulus, investors would be better off expecting the economy Mr. Trump inherited rather than the one he has promised.

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