Don’t Believe The Hype On Consumer Confidence

Barclays warned investors not to get too wrapped up in sentiment surveys regarding business and consumer confidence. It’s a nice short-term momentum indicator but it can set growth investors up for disappointment down the road. Here’s why. Soft data on surveys are often used by the media and the president himself to showcase a sense of economic well being. For Trump, it’s been a way to show he is Making America Great Again. But on the hard data side, Barclays notes that economic activity is modest at best. For example, at a reading of 115.3 in February, the NFIB Small Business Optimism Index leaves small business sentiment a touch below the historical highs in the series dating back to the mid-1970s. Consumer confidence has also risen, and, based on various surveys, household sentiment has returned to levels last reached in 2000. All good. Until you look at Barclays’ GDP trackers showing a subdued 1.4% quarterly growth rate, which begs the question of whether the growth rates of spending and investment will accelerate in response to improved sentiment or whether actual policies are needed to generate stronger activity. “We believe the latter,particularly in the area of business investment,” says economist Michael Gapen of Barclays. “Our reading of the data suggests investment spending follows activity, not the other way around.” Sentiment is in fifth gear. The economy is not. Improved business and consumer sentiment does not drive investment spending, Gapen says. A sentiment-induced acceleration in investment growth would be “highly unlikely” to pre-date a pickup in corporate investment and production activity. We may be in a cart before the horse scenario here. Barclays has been getting more bearish on “The Donald”, with analysts forecasting just before the Obamacare do-over disaster that Trump might not pass any major reforms this year, including corporate tax cuts and infrastructure spending, now no longer expected until August. Gapen is forecasting U.S. GDP growth to be 2% this year, not much different than under Obama. Next year should be a winner, barring the unforeseen political landscape of mid-term electoral politics. Barclays expects to see corporate tax cuts boost spending, and that is when we will see true upticks in economic activity and companies investing in growth.