Survey Says... Ignore The Hard Data At Your Peril
Surveys of both consumers and businesses show there is an extreme level of confidence regarding future GDP growth. Consumer confidence is now at its highest level since 2001. Small and medium-sized business owners, the driving force of growth in the economy, appear downright giddy; as the NFIB Small Business Optimism Index recently soared to its highest level since 2004.
The Philly Fed Index, a survey that gauges how well manufacturers are feeling, hit its highest level since 1984. Business leaders are betting on tax cuts, infrastructure spending and a scale-back of onerous regulations that will, hopefully, make America great again!
But just as we were beginning to get tired of all this “winning”, investors are also receiving a strong reality check from the actual hard data regarding the current state of economic activity.
The economy slowed more than expected in the fourth quarter of 2016. Gross domestic product increased at a lackluster 1.9 percent annual rate at the end of last year. For all of 2016, the economy grew only 1.6 percent, which was the weakest pace since 2011.
And despite all the good feelings about the current state of affairs, the Atlanta Fed’s GDPNow model, is forecasting real GDP growth (at a seasonally adjusted annual rate) in the first quarter of 2017 to come in at a pitiful 0.9 percent.
The hype regarding the potential implementation of Trumponomics appears to be creating a trenchant gap between today’s economic reality and hope about the future.
More evidence of this gap can be found in the January Durable Goods Report, which met expectations at 1.8 percent. However, excluding aircraft, transportation equipment fell 0.2 percent, well below the estimate of a 0.2 percent gain. Core capital goods showed a 0.4 percent decline in orders. This ends 3 months of strength for this reading and dispels the hope for a first quarter business investment boom suggested by the business confidence readings. Unfilled orders were down 0.4 percent and have now fallen in 7 of the last 8 months--the deepest contraction since the Great Recession.
And we may need to start working on that wall right away if investors are to believe that confidence surveys will catch up with reality. Construction spending fell a sharp 1.0 percent in January. The consensus was for construction spending to increase 0.6 percent.