Since the end of last year, US business sentiment data has improved dramatically off the back of heightened business optimism. Expectations surrounding Donald Trump’s proposed regulation bonfire and corporate tax cuts has pushed so-called soft (sentiment) data in the US to an all-time high.
However, while the soft data appears to show a bright outlook for US businesses’ the hard data (quantifiable) shows a different picture altogether, as Goldman recently pointed out as well.
Economic Data – – Divergence Between Hard Data And Soft Data at record
Morgan Stanley’s Graham Secker, chief European equity strategist and Matt Hornbach, the global head of rates strategy for the bank captured this divergence in a great chart published last week. The chart shows that upside surprises appear to be completely driven by soft data, while hard data is simply coming in as expected. To put it another way, the hard data is unfolding in line with the Federal reserve’s 2017 outlook, which is why the central bank has neglected to provide any upside revisions to its 2017 outlook.
The divergence between hard and soft data is having an impact on the various forecasts used by economists to predict economic growth for the US. For example, Morgan Stanley points out that the New York Federal Reserve Bank’s current Q1 GDP tracking forecast is currently 3% versus the bank’s own tracking of 1% and the Atlanta Fed’s GDPNow tracking of 1%. Both of Morgan Stanley’s analysts and the Atlanta Fed use mostly hard data to calculate tracking figures compared to FRBNY, which incorporates soft data into its tracking.
But the big question is, will the hard and soft data reconcile and in what direction? Morgan’s chief economists believe that after the first quarter, GDP growth will recover in Q2, possibly up to 3%, in line with the Fed’s full-year growth expectation of 2%. If this scenario does indeed play out, Morgan sees it as a positive for markets:
“Optically, a 2Q GDP bounce back would perhaps be taken by markets as the hard data correcting to the soft data—in other words, risk appetite may find renewed inspiration as positive hard data unfolds. But from an economist’s point of view, smoothing through the volatility simply looks like the outlook for around 2% growth remains intact. Moreover, we do expect that the breadth of the 2Q rebound in hard data will be fairly limited, with a swing in consumption as the main driver of the expected 2Q upside, followed by a slightly better net trade and inventory profile.”