Why Sentiment is a Poor Economic Indicator

Today’s Empire Fed index showed a very positive sentiment reading despite the economic data showing

Shipments down
Orders down
Unfilled Orders down
Delivery Time down
Inventories down
Number of Employees down
Avg Workweek down
Expected number of employees down

Nearly all the economic indicators in the report were down yet, sentiment was up!

The National Association of Homebuilders Index measuring the sentiment of homebuilders was released today and it rose to the highest level since 2006.

How people feel is often disconnected with reality. Hope springs eternal.

When a baseball manager asks a pitcher who is taking a shelling on the mound “how do you feel?” He doesn’t say “my slider ain’t working and I am getting hit bad” Instead he responds “I feel good coach”.

Or the conversation that the boxer has with his trainer when he returns to his corner after taking a beating. “How do you feel champ? The boxer doesn’t say “it feels like my nose is split open and my arms are heavy” Instead he responds “I feel good”

Sentiment readings along with the state of the stock and real estate markets are the unholy trinity of leading economic indicators.

In the fall of 1929 the real estate and stock markets were up and consumers felt great.

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