Hard Times: Time for the Hard Data to Catch Up to the Soft Data

Key Points

  • Soft economic data has been on a tear; will the hard data catch up?
  • After a "typical" weak first quarter, economic growth should accelerate.
  • Based on history, soft data is likely to retreat, while hard data is likely to accelerate.

Much ink has been spilled by Wall Street analysts, the media, and yours truly, about the historically-wide spread between the so-called "soft" and "hard" economic data. Before getting to my latest thoughts on the subject, some definitions are in order. Soft data is generally survey-based readings, including many of the most widely-followed confidence indicators—incorporating both consumer and business measures of confidence, as well as purchasing managers' surveys (PMIs). Think of it as the qualitative data. On the other hand, hard data is the quantitative data—actual measures of economic activity.

Soft data surging

The spread between the soft and hard data (using any number of indexes created to track this) hit a recent high; with the soft data reflecting a post-election surge in optimism. You can see the relative strength of the soft data vs. the hard data in the chart below.

Nomura Hard Data Surprise Index

Source: Bloomberg, as of March 22, 2017. Indices track data surprises (actual – economist expectations) through time. Surprises are standardized, and each indicator has an equal weight.

In particular, the spike in soft data was aided by a parabolic move up in the small business optimism index published by the National Federation of Independent Business (NFIB), as you can see in the chart below. All common measures of consumer confidence and sentiment have surged as well.

NFIB Small Business Optimism Index

Source: FactSet, as of February 28, 2017.

Another measure of soft data which has accelerated sharply is the Business Roundtable CEO Survey, seen in the blue line below. As you can see, fixed investment tends to be highly correlated to CEO optimism, so this is one suggestion of improving hard data to come. According to Strategas Research Partners, CEO confidence has led capital spending by one quarter; so if animal spirits are going to show up in the U.S. economy, this is a key metric to watch.

Private nonresidential fixed investment versus Business Roundtable CEO Economic Outlook Survey

Source: FactSet, Strategas Research Partners. Fixed investment as of December 31, 2016. CEO Outlook Survey as of March 27, 2017. Gray-shaded areas indicate periods of recession.