You know, when you think about the upturn in sentiment indicators (i.e. “hope” or, “animal spirits”) you need to find yourself an explanation that doesn’t include “geopolitical stability.”
Because if you’re looking at geopolitical stability, there’s not a whole lot to get excited about.
Well actually, that’s not true. There is a whole lot to get excited about. Where “excited” means “fucking terrified.”
There’s a semi-global populist revolt that in France’s case threatened to conjure the ghost of the Reich and in America’s case installed a reality TV show host and government neophyte in the White House. There’s drama on the Korean Peninsula that, to let the boy king in Pyongyang tell it, could result in nuclear war at any moment. There’s Syria, which has “proudly” become a failed state’s failed state. And of course there’s Russia, which apparently thinks the right way to go about restoring the bipolarity that existed during the cold war is to hack elections.
Of course that kind of “excitement” should dampen “hope” and “animal spirits” because it says nothing good about the future of global growth and trade. Indeed, in the case of populism anno 2017, the aim is to actively subvert trade.
So what gives with the “animals” and the “spirits” and the “hope”?
Well on Tuesday, Goldman has an answer: economic conditions. The only problem: the recent dour PMIs out of China may mean we’ve already seen the peak.
US consumer confidence has soared since November 2016, raising the question: Did the election of Donald Trump unleash ‘animal spirits’ that drove US consumer confidence to cycle highs? This market rally is likely on surer footing if a rational mix of current economic conditions and expectations about future conditions are fueling the sentiment surge. On the other hand, to the extent that ‘animal spirits’ are a factor, the rally rests on a shakier foundation.
While many have linked the recent surge in economic optimism to animal spirits fueled by the fiscal agenda of the new administration in the US, the view is called into question by the fact that improvements in sentiment have been highly global in nature. Exhibit 1 plots the GDP-weighted aggregate of consumer sentiment surveys from twenty-one countries, both advanced and developing economies. Global sentiment has been steadily improving for several years, and the most natural explanation is the high degree of co-movement in the underlying economic conditions. Indeed, the inflection in global confidence around 2013 roughly coincides with the inflection in global growth signaled by our Global Leading Indicator.
This does not necessarily rule out animal spirits. For one, the global nature of news coverage and social media today make it plausible that animal spirits, fueled by globally shared narratives and beliefs about current economic conditions and the prospects for future growth, could co-move globally. Second, we suspect that sentiment has a tendency to overshoot hard data in the late stages of most economic expansions, which could fuel global animal spirits in the late stages of the global business cycle.
While the rising tide of sentiment has lifted all boats, the US still floats on top. The heat map in Exhibit 2 is underpinned by twenty-one international consumer sentiment indicators. The data are first scaled by regressing our Global Current Activity Index (CAI) on the current and two lag values of each country’s survey. The predicted value from this regression is then expressed in common units of the implied global GDP growth rate. The indicators are ranked in descending order according to their implied growth rates in March. The US ranks first with an implied global GDP growth rate in March of 5.4%, whereas South Korea ranks last at 1.3%. These levels are meant to be suggestive rather than literal, but they convey the message that even among the high levels of consumer confidence globally, the surge in US sentiment stands out.
Exhibit 2 is consistent with our previous research showing that President Trump’s win likely contributed to sentiment at the margin. Even if the tax cuts, deregulation, and faster growth never materialize, our research suggests that the mere enthusiasm for the new administration’s policy agenda – the animal spirits – may be feeding forward into real activity. At the same time, the global nature of this sentiment rally reveals a broader phenomenon at work than whatever animal spirits may have been activated by US policy optimism. Recent data (e.g. the weak ISM print in the US and the soft Chinese PMIs) are showing early signs that these forces may be fading, which seems to indicate that market risks are skewed to the downside. But even if we have reached peak sentiment, peaks can plateau. We may yet have a way to go before the data deceleration begins to rattle global confidence.