Spreading Confidence

By: Stephen Smegal

How is our Economy actually doing? It would appear that our economy is doing well because there is so much positivity and optimism, backed by the red hot real estate market valuations. Also aided by consumer confidence, which has soared to a 16 year high in a Conference Board poll released this week. In addition, small business owners and CEO’s of the top US companies have also shown stronger optimism now than at any time in the last seven years. So there should be no doubt that the economy is hot right? Optimism is not the same as hard quantifiable economic facts. There is a difference between what people feel about the economy and hard quantifiable economic stats about the economy. Quantifiable stats are actually saying that the economy finished last year growing at just a 2.1% annualized rate, which would make it one of the weakest expansions in the post-World War II era. Auto sales have shrunk after a solid 2016, retail sales have digressed in February, and business spending remains quite moderate. Economists polled by the Wall Street Journal have said that personal income has risen by about 0.4% in February, and consumer spending has risen by about half that at 0.2%. These indicators are trending in a positive direction however, these results are no better than they were in January and overall far from exceptional for a supposedly hot economy. The divergence between quantifiable data and reports based on sentiment, has never been as large as it is in 2017. The confidence in the economy was lifted by the inauguration of the Trump administration, which has promised to take actions to support economic growth. However, there is no statistical evidence that they truly have started to accomplish this promise. Something has to change because the spread between hard and soft economic indicators cannot continue to increase. Either confidence in the economy will start to deteriorate when people start realizing that consumer confidence is not backed by job and income increases, or confidence in the economy will lead to income increases and more job creation. The most interesting aspect of this massive spread between economic data and confidence is that it will increase prices of shares in the stock market and inflate the price of property in the real estate market above its true value. This is because of the perception that the economy has strong growth. When incomes (as hard data shows) are not increasing impressively people will not be able to afford the homes/mortgages they own. Also, when businesses and CEO show strong optimism and invest in large projects, they are taking on more risk than they believe because as the hard data also shows consumer spending is not nearly at the levels it should be for the amount of optimism shown in our economy.