There is a current debate circulating in economic circles around the recent divergence in “soft” economic data, which is based on consumer and business surveys, and “hard” data, which is based on actual economic reports. Since the presidential election last fall, “soft” data from surveys such as the University of Michigan consumer confidence and ISM manufacturing and services surveys have taken off.
Confidence in the economic outlook is strong. “Hard” data such as nonfarm payrolls, retail sales, housing data and industrial production have lagged. The latest disappointment was March retail sales, which declined 0.2% from the prior month. February retail sales also fell month/month. This marked the first time retail sales have fallen in back to back months since early 2015. We also saw inflation, as measured by CPI, fall in March due to weakness in many categories. The month/month drop of 0.1% for Core CPI was the first decline since 2010.
The weakness in “hard” data is impacting first quarter GDP growth. As predicted by the Atlanta Fed’s GDP Now model, which predicts quarterly growth, the 1 st quarter is expected to grow by just 0.5%, having steadily declined in recent weeks.
Some economists are predicting that the economy will bounce back in Q2, with estimates of growth in the mid-3% range. These predictions in part are based on the “hard” data responding to the strength in the “soft” data prints. Whether or not this happens will likely have implications for not just the economy but also for financial markets. The stock market and corporate bond credit spreads trade on confidence, and a failure of the data to live up to expectations could have negative impacts for both. Stay tuned..
Source: Bloomberg, Citigroup, Federal Reserve