There is perhaps no topic that’s gotten more attention in the “exciting” world of economics than the “hard” data, “soft” data disconnect.
Indeed, the argument over which one (i.e. the “soft” or the “hard”) is wrong has become just about as contentious as a debate between economists can get (thankfully, disagreements between economists don’t often deteriorate into drive-by shootings).
One thing’s for sure: a recent dip notwithstanding, if the “soft” data euphoria turns out to be “right,” well then by God we’re getting ready to usher in a veritable renaissance for growth.
On that point, have a look at the following table out this morning from Goldman:
Look at those numbers (the ones in green)! Here’s the accompanying color:
If US GDP growth were tracking sentiment data alone, the US economy would be growing at its fastest rate of the post-crisis period. While our estimate for the preliminary release of Q1 GDP on Friday is currently tracking at just +1.4% (qoq ar), our US Current Activity Indicator (CAI) suggests the economy is growing at 2.8%. If this is decomposed into our sub-sector CAIs for our “hard” vs “soft” data, the implied growth rates of GDP are 2.1% and 3.3%, respectively.
Exhibit 1 drills deeper into the soft data to see precisely where the improvements have been coming from. The cell values in this table (illustrated by the heatmap) show the levels of GDP growth implied by the univariate regressions of our broad CAI on each indicator (plus 12 lags). Both activity-oriented surveys (like ISM) and pure sentiment surveys (like NFIB Small Business Optimism) are running “hot”, while “hard” data indicators, like industrial production, are running cooler (although still quite strong). And the implied magnitudes of GDP growth are unrealistically high, with the Conference Board’s index of consumer expectations implying GDP growth of nearly 5%, and the NFIB’s small business optimism index implying growth of 6.8%.
Read that last underlined bit again.
And then laugh.