Confidence in US economic outlook: will reality match expectations?

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The surge in confidence in the US among consumers, producers and homebuilders has spread to small business owners. In December the National Federation of Independent Business (NFIB) index, which measures small business optimism, rocketed to its highest level since 2004, with, what the NFIB called a « stratospheric 38-point jump in the number of owners who expect better business conditions » Confidence among small business owners had suffered in the run-up to the presidential elections and has been in the doldrums since the 2007-2008 Great Financial Crisis. This data reinforces the impression that in the last two months there has been a major shift in confidence within the US economy (see exhibit 1 below). Animal spirits in the US economy have been awoken.

Preliminary results from the University of Michigan survey showed that consumer confidence fell by a notch in January. But that still leaves this index at a post-recession high.

Exhibit 1: Recent data from three surveys suggest a significant upturn in confidence is underway within the US economy

US economy confidence

*University of Michigan survey of consumer confidence **Monthly National Federation of Independent Business (NFIB) Index of small business optimism  ***National Association of Homebuilders (NAHB) conducts a monthly survey of NAHB members to take the pulse of the single-family housing market.

Source: Datastream, BNPP IP as of January 2017

Will this optimism translate into stronger economic data?

It is hard to ignore such strong signals from the leading indicators. Small business as a sector is a strong driver of investment, employment and growth in the USA. But, as we have mentioned before, we find it difficult to see where the drivers of a growth surge would come from at this stage in the mature US business cycle.

The surge in the NFIB index was primarily driven by sentiment indicators, but less so by indicators related to what these small business owners are actually doing in terms of expanding their businesses. While consumer confidence has soared, retail sales were mixed in December. The headline growth number was strong at 0.6% month-on-month (MoM) and 6.8% quarter-on-quarter (QoQ) annualised in fourth quarter 2016. Car sales even surged by 11.6% QoQ annualised. However, stripping out car sales, petrol sales and sales of building materials to get a better proxy for consumption as measured in the GDP data, retail sales were up by only 0.2% MoM in December and 3.6% QoQ annualised in the final quarter. And these are nominal numbers. Core inflation is just above 2%, so in real terms spending is weaker.

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