The US economy is holding up, but Americans don’t seem to see it that way.
The off-kilter vibes reflect a widening gap between “hard data” and “soft data” related to the economy. Simply put, forward-looking data like consumer sentiment is way down, while the backward-looking data the Fed uses to inform policy, such as employment data, is still strong.
The dynamic continued to play out this week.
The latest consumer sentiment reading on Friday showed an unexpected drop this month. According to the University of Michigan, the preliminary index reading fell from 52.2 to 50.8.
That’s the second-lowest sentiment reading the index has ever recorded. But it comes against a backdrop of upbeat developments, including cooler inflation data, an easing of US-China trade tensions, and a rally in stocks that erased year-to-date losses.
“Consumers do not hold the belief that just because the most recent CPI print was not too high for the month of April, that will continue to be the case for the rest of the year,” Joanne Hsu, the director of the University of Michigan’s consumer surveys, told Business Insider. “Consumers are waiting for the other shoe to drop.”
The outlook among business leaders has also weakened. The CEO Confidence Index, which measures how corporate leaders are feeling about business conditions over the next 12 months, dropped in April compared with levels at the start of the year.
The sour feelings about the economy don’t square with the hard data.
Inflation was unexpectedly cool during April. The consumer price index rose 2.3% for the month, down from last month’s 2.4% increase. That reflects the lowest pace of inflation since 2021, according to the Labor Department. Producer prices were also cooler in the month.
The job market, meanwhile, is holding up. Jobless claims were steady this week at about 229,000. The unemployment rate, while higher compared with levels at the start of the year, is near a historical low of 4.2%.
Bank of America found in an analysis this week that the gap between the soft and hard data was the widest on record.
BofA Global Research
Tailwind to the market
Opposite Main Street, good vibes on Wall Street are propelling a strong rally this week.
The S&P 500 was on track Friday to notch its fifth-straight winning session, with the benchmark index up 5% for the week on optimism around trade negotiations between the US and China.
Bank of America analysts said in a note this week that “panic” in the soft economic data could actually be good news for stocks as long as the US avoids a recession.
Over the past 70 years, when soft data measures weakened without a recession, US stocks rose an average of 17% over the next 12 months.
The bank does not expect the economy to enter a downturn this year, partly because of strength in hard economic data, such as low jobless claims and higher wage growth relative to inflation.
“Unless the hard data cracks, we suggest investors take advantage of relative value trades in each asset class. We remain bullish equities and credit, cautious on government bonds, and opportunistic on commodities,” analysts wrote in a note on Friday.
Other banks have also turned more bullish on stocks on the back of positive economic data and optimism around a US-China trade deal.
Goldman Sachs lifted its stock forecast for the year and lowered its projected risk of a recession to 35%, down from 45%.
Barclays, which initially anticipated a mild downturn in the second half, said it was removing a recession from its base-case forecast.
