The Two Best Periods Of Optimism In US History Had One Thing In Common: Impeachment

Also, inflation expectations dropped to a record low.

On the headline, University of Michigan sentiment was a snoozer on Friday. As such, we didn’t immediately cover it.

The final print for December was 99.3, flat (basically) from the 99.2 preliminary print. The range of estimates was 98 to 100.2.

As a reminder, the bounce off the Trump-era low in August is the very definition of “V-shaped”. Everything is moving in the right direction except the “Do Nothing” (sorry) ISM.

Upon closer inspection, there were a couple of notables from the final U. of Mich. survey for this month.

For one thing, long-term inflation expectations fell to a new record low of 2.2%. “Inflation expectations declined in the December survey, with both the year-ahead and five-year expected inflation rates falling”, the survey’s chief economist Richard Curtin said. “Over the next five years, consumers expected an annual inflation rate of just 2.2% in December 2019, the lowest level since this question was first introduced in the late 1970s’.

That came on the heels of a marginally hotter-than-expected core PCE print Friday morning.

“The spot print suggests that inflation ain’t dead, but the expectations data will embolden the doves to argue against hiking for a long time”, Bloomberg’s Cameron Crise (who this week assessed that we deserve just a “gentleman’s B” for three years of macro musings in these pages) remarked.

Remember, if there’s one message Jerome Powell has tried to drive home over the last two policy meetings, it’s that inflation would have to rise sharply in order to put rate hikes back on the table. The underlying message in the Fedspeak is that the reaction function is asymmetric. The bar for more cuts is infinitely lower than the bar for hikes.

The more subdued the inflation data, the stronger the argument for keeping policy accommodative. Just ask Donald Trump.

The other notable from the final results for December comes courtesy of a comparison Curtin makes between “the two best extended periods of optimism in the history of the surveys”.

We’ll present this excerpt and accompanying visual without further comment.

Both included an impeachment: the four years from 1997 to 2000, when the Sentiment Index averaged 105.3, and the three years from 2017 to 2019 when the Index averaged 97.0 (see the Chart). On average, the 2017-2019 Index was 92% of the earlier period. Surprisingly, for the bottom 10% in the income distribution, the Index was 96% of the earlier period, while the top 10% the Index was just 89% of the earlier period. There was little difference across income thirds: 93% for the lowest third to 91% for the highest.


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