Understanding the Current Economic Landscape
In 2021, we’ve witnessed a significant divide in economic indicators, with some pointing towards a steep decline and others showcasing a robust economy. This discrepancy has become one of the central sources of uncertainty in today’s markets.
Soft vs. Hard Data: What Do They Mean?
Economic data can be categorized into two main types: “soft” and “hard.” Soft data, gathered through surveys of consumers, businesses, or investors, reflects perception and expectations rather than direct economic measurements. Examples include consumer confidence indices (like the University of Michigan’s index), business activity and supply management indices (PMI, ISM), and inflation expectation surveys.
Hard data, on the other hand, directly measures real economic activity using quantifiable figures such as Gross Domestic Product (GDP), unemployment rates, industrial production, retail sales, or durable goods orders. These are collected through official surveys, administrative records, or censuses and usually have a delay in publication due to the time required for accurate processing.
The Interplay Between Soft and Hard Data
While soft data doesn’t always translate into real-world actions (like investment or hiring), it often predicts movements in hard data. For instance, if businesses report increased demand expectations in upcoming months, they’re likely to boost production or hiring, eventually reflected in hard data. However, this relationship isn’t perfect; analysts compare both types of data to detect discrepancies, such as improving perceptions but weak hard data, indicating uncertainty or excessive optimism.
Current Economic Scenario in the US
Since the beginning of the year, economic actors have faced a harsh reality. The threats of arbitrary and substantial tariffs on numerous countries materialized, along with concerns over reduced public spending in sensitive areas like health and education due to the Department of Efficiency’s (DOE) actions. These factors combined to create a gloomy outlook among producers and consumers, causing soft data surveys to plummet.
Despite these pessimistic soft data signals, hard data has not shown a corresponding negative impact. The GDP growth in Q1 was less severe than anticipated (-0.3% vs -2.5% expected), job creation remains positive, and consumer spending and retail sales have held steady with positive growth.
May’s Economic Outlook
As May arrives, investors grapple with conflicting soft data (still poor) and hard data (showing a healthy economy). A recent interesting signal comes from The Conference Board, which reported a consumer confidence index of 98.0 points, marking a five-month decline but significantly above April’s 85.7 points and market consensus’ 87.1 points.
It appears that the prospects of trade deals and President Trump’s tax plan approval have reversed the negative sentiment among economic agents, pointing towards a victory for hard data. The recent stock market enthusiasm and expectations of the Federal Reserve delaying interest rate cuts support this notion.
However, it remains to be seen if the soft data improvement will be sustainable or if further risk-averse reactions will emerge from unexpected public policy decisions by President Trump.
Key Questions and Answers
- What are soft and hard economic data? Soft data, gathered through surveys, reflects perception and expectations. Hard data directly measures real economic activity using quantifiable figures.
- How do soft and hard data interact? Soft data often predicts movements in hard data, though the relationship isn’t perfect. Analysts compare both to detect discrepancies.
- What’s the current economic situation in the US? There’s a divide between pessimistic soft data (due to tariff threats and reduced public spending) and positive hard data (GDP growth, job creation, consumer spending).
- What’s the recent outlook for the US economy? Despite poor soft data, hard data shows a healthy economy. The Conference Board’s consumer confidence index recently improved, suggesting a potential shift in sentiment.
- What factors could influence future economic trends? Trade deals, public policy decisions (like President Trump’s tax plan), and Federal Reserve actions will play crucial roles in shaping the future economic landscape.
