By Peter G Hall, Vice President and Chief Economist
To say that world confidence in America has taken a bit of a hit in the last year is likely an understatement. Moreover, in the ‘grey zone’ between the end of the election and Day 1 of the presidency, that confidence has likely drifted lower. But confidence within America could hardly be more different. Indicators show a post election surge in the ‘feel-good’ factor south of the border that really seems to defy belief. What is going on down there?
Well first off, if the rest of us are all feeling the opposite, why do we care? Precisely because consumers and businesses that are upbeat tend to spend and invest a lot more than when they’re gloomy. And stateside, we’re talking about consumers that make up almost 70 per cent of the world’s largest economy, directly accounting for 12-13 cents of every dollar spent worldwide. If something is stirring this powerful group, just about everyone feels the positive effects, either directly or indirectly. Businesses aren’t as large a chunk of the economy, but their influence has a very global reach. If their view of things has brightened, there could be a sea change in investment behavior in the offing. Why? First, after years of under-investment, they are generally cash-rich. Second, outside of the resource sector there are some pretty tight capacity constraints that need to be addressed. In the past, this has generally benefited the world economy.
How dramatic is the up-shift in sentiment? According to the Conference Board, consumer confidence leapt almost 13 Index points in November and December, reaching a height last seen in mid-2001. That’s really saying something. This is a variable that has traced out the major movements in the US economy with precision over the past economic cycle. From pre-recession heights, nationwide confidence plunged to depression-like levels in 2009, a terrifying chasm that was mercifully short-lived. Confidence rebounded – but to recessionary levels, where it parked stubbornly for five years. Finally, confidence moved steadily into the ‘normal’ zone, but then parked at that plateau for another two years. Decent, but hardly recovery-style performance. Then, an uptick that began in June – capped by the October-November surge.
It’s not alone; the other major gauge of consumer coziness is the University of Michigan survey. A slightly different measure that doesn’t always agree with the Conference Board’s marker, this one is currently singing out of the same song book. It too saw a two-month vault that put it at its highest peak since a one-month wonder in early 2004, and more importantly since a sustained peak in 2000. Like its rival, this Index’s new high came primarily from a surge in the future expectations component.
Is it just consumers? Hardly. The NFIB has been conducted since mid-1975, and since then there has never been a surge in confidence like the November-December movement. The rise was meteoric, instantly catapulting the series back to 2004 levels. Although less dramatic, the Duke-Fuqua CFO survey posted a 4th quarter result on optimism that is the highest since early 2007.
Confidence is no guarantee of higher GDP growth. However, when lined up with decent underlying fundamentals, the index does tend to reflect stronger economic growth. In the early 1970s and again in the early 1980s, surging confidence was consistent with impressive increases in GDP. The same was true in the mid-late-1990s, but we haven’t really seen a similar recovery-style rally this time around. What we’re now seeing could be it.
What might it mean? While others may be doubting America, all evidence of self-doubt stateside seems to have been erased. It stands in stark contrast to their election’s acrimony, but if sustained, it marks the return of this cycle’s great ‘missing ingredient’, and could be the most refreshing change to the economic picture that we’ve seen in this dubious decade.
The bottom line? Pummel an economy, then dash hopes of a return to growth for seven long years, and you create a downcast and disillusioned population that becomes increasingly difficult to revive. Strange as it seems, America seems to have rustled up the remedy this summer. If so, the economy could go into a higher gear by itself – without the need of a policy potion.
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