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No confidence in confidence data?
Current sentiment surveys reveal very high levels of confidence, signaling stronger economic activity than is reported in reality.
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Financial markets treat surveys of business sentiment with considerable reverence. (Shutterstock/File)
F
inancial markets treat surveys of business sentiment with considerable reverence. The headline measures are among the most widely forecast economic releases. If investors are prepared to go so far as to pay economists to forecast data, that tells us that the data is considered important in the financial markets.
Current sentiment surveys reveal very high levels of confidence, signaling stronger economic activity than is reported in reality. I believe these sentiment indicators are exaggerated, and will narrow the gap with real world data.
There are five reasons such surveys may be flawed indicators:
Surveys do not pretend to report growth, though are often presented as if they do. The media frequently reports on them inaccurately by offering statements like “manufacturing expanded in Italy” when what happened was an opinion poll of manufacturing sentiment among a sample of Italian firms was more optimistic.
