Everywhere you look, there’s enthusiasm for the US economy.
Sentiment indicators from consumer confidence to business confidence to CEO confidence to investor confidence to manufacturers’ confidence are all on the rise as the economy digests the election of Donald Trump.
It appears that Americans believe that some of Trump’s more aggressive economic policies — massive fiscal stimulus, a cut to taxes, etc. — are going to lead to a jump in GDP growth and personal incomes.
Not to rain on the parade, but the optimism that the surveys are showing may be premature.
While improving sentiment is certainly encouraging, it doesn’t mean an economic boom is right around the corner. Real data on the US economy that has come out since the election hasn’t blown the roof off of expectations. In order for the enthusiasm to sustain itself, real results have to come through.
Neil Dutta, the head of US economic research at Renaissance Macro, warned for caution in a recent email to clients.
“We’ll be keeping a close eye on whether the recent surge in sentiment will be ratified by the incoming hard-data,” wrote Dutta. “Most of the burst in the surprise indicator has been in the survey data.”
The surprise indicator that Dutta is referring to is the Bloomberg surprise index, which measures the degree to which US economic data points come in above or below economists’ expectations. While the index has been on the rise, Dutta noted that most of that has come from surveys and sentiment indexes, rather than more concrete economic data.
In just the past few weeks we’ve seen “harder” data miss. Retail sales and industrial production both underwhelmed expectations on Wednesday. Additionally, year-over-year core CPI slid for the fourth straight month and the rest of the inflation indicators came in right in line.
Even the headline number for the jobs report on Friday was lower than expected and average hourly earnings growth unexpectedly dropped from the month before, although the unemployment rate also fell.
It’s great that Americans are feeling better about their economic outlook, but now the real economy has to back that excitement up.