Poll results, economic performance are diverging
Positive sentiment doesn’t lead to immediate actionJune 22nd, 2017
Since the end of the U.S. elections last November, survey measurements of how people feel about the economy and their personal situations have risen dramatically.
The Conference Board Consumer Confidence Index increased from a reading of 100.8 as of Oct. 31, 2016, to 117.9 as of May 31. The University of Michigan Consumer Confidence Index rose from 87.2 to 97.1 during the same period.
That increased confidence and optimism hasn’t been limited to consumers. Small business confidence—as measured by the National Association of Independent Businesses In-dex and the CEO Confidence Index—also made strong gains.
Given the upward movement of these indices, many economists argue that economic growth should follow. Unfortunately, first-quarter economic data didn’t support that argument. First-quarter gross domestic product grew 1.2 percent on an annualized basis, which is weaker than the fourth quarter rate of 2.1 percent. However, first-quarter data is consistent with the pattern that has occurred throughout much of this business cycle and indicates that the economy hasn’t shifted gears to a high growth rate yet.
What survey and sentiment polls tell us is that the nation came away from the elections believing that positive change could happen, and faster economic growth was a distinct possibility. The economic data tells us that although the nation is more confident and optimistic than before the elections, it is now waiting to see what actually transpires.
Will high consumer confidence and sentiment lead to higher economic growth? To answer that, consider a simple explanation for understanding the consumer and ultimately, the economy: Jobs create income. Income creates fuel to power spending. Consumer spending accounts for nearly 70 percent of economic growth.
Then, examine what has happened with year-over-year growth in these three categories since Oct. 31, 2016, or before the elections.
Nonfarm payrolls increased 1.7 percent as of Oct. 31, compared with a year earlier, and 1.6 percent as of May 31, compare with a year earlier. Average hourly earnings increased 2.7 percent year over year as of Oct. 31 and 2.5 percent as of May 31. Personal spending rose 3.1 percent through Oct. 31 and 2.6 percent through April 30.
The current economic data for those categories show that the economic conditions for the consumer remain roughly the same as before the elections. Thus, the divergence between how the consumer feels and what the consumer is actually doing. Right now, consumers appear to have taken a wait-and-see position until tangible evidence indicates that their financial situation is going to improve.
A sector of the economy that demonstrates why divergence may exist is the housing market. Although confidence and sentiment are elevated, all of the national housing data—housing starts, pending home sales, existing home sales, and new home sales—had lower year-over-year growth rates in April as compared to last October. Higher interest rates, lack of supply, and affordability issues all played a role, showcasing how factors other than confidence and optimism may determine consumer buying patterns and create a disparity in how people feel versus how they act.
Where economic activity more closely matches the surveys and sentiment polls is on the goods producing side. The year-over-year growth rates for the major goods producing categories—factory orders, industrial production, and construction spending—have shown solid increases when comparing the most current data available from April to last October.
The fact that how consumers and businesses feel is diverging from what they are doing isn’t necessarily concerning. It’s probably accurate to say the economy won’t expand if consumers and businesses are downcast and pessimistic, but it’s likely not accurate to say the economy will expand when they are confident and optimistic. Positive sentiment may be a first step toward increased economic activity, but it doesn’t predict future activity reliably.
Further, it’s important to note that consumer or business sentiment may not translate into immediate action. A consumer may feel great and be very optimistic about economic conditions or a personal financial situation improving, but spending habits or business plans may not change until tangible developments—wage increases, decreased regulatory burdens, lower taxes, etc.—occur.
With some distance from the November elections and little clarity in terms of the new administration’s approach to the economy, consumers and businesses likely will stay on the sidelines for the time being. The ball is clearly in Congress and the President’s court to enact fiscal policy that will provide stimulation. Until then, the economy should continue to plug along in the 1 percent to 2 percent growth range that has existed for most of this business cycle.
Steve Scranton is the chief investment officer and
economist for Spokane-based Washington Trust Bank.