Economic Surveys Are a Danger to Investors

(Bloomberg) -- Surveys or opinions of economic activity, otherwise known as “soft data,” worked very well in predicting the economy for decades. But starting in the mid-1990s, and especially following the financial crisis, these surveys have become hostage to “bandwagon biases” due to the growing influence of internet and such things as politics.

We believe the soft data, and subsequent forecasts, are suffering from a circular reference due to groupthink, herd mentality and political preferences. This caveat is important when considering the eye-popping Wall Street forecasts since late 2017. The stock market’s recent malaise is likely an acknowledgement on the part of investors of the unattainable estimates that exist for earnings, wages and economic growth.

Case in point: the University of Michigan’s confidence survey released Friday revealed a record 35 percent of respondents heard favorable news about the economy. Is there really five times more positive economic news now than was present at the peak of the tech and housing bubbles?

Or is it that Twitter (started in 2006) and Facebook news feeds (which were in their infancy in 2006) plus other social media are contributing to an internet-driven bandwagon effect? If so, soft data and forecasts may reflect interpretations of the herd mentality and not the economy.

Economic Surveys Are a Danger to Investors

The next chart shows the Bloomberg Consumer Comfort Index broken down by self-identified political allegiance. It argues one’s outlook for the economy is more determined by their politics than the economy.

Economic Surveys Are a Danger to Investors

It is no secret that the National Federation of Independent Business small business owners skew heavily Republican. Are these biases showing up in their survey? The chart below shows the results of the NFIB question “Is it a good time to expand?” Small businesses are indicating the opportunity to expand are better than any period during the 42-year history of the survey.

Economic Surveys Are a Danger to Investors

Small business are not alone in near record high optimism:

  • Business Roundtable CEO Survey: 16-year high
  • ISM Purchasing Manager’s Index: 14-year high
  • Conference Board’s Consumer Confidence: 18-year high

We pulled together all of these surveys’ data into a composite soft data index (orange line) for comparison to hard data, or official releases (blue line). These indices measure incoming data releases relative to their one-year average. Both the trend of the data and its position above or below zero matters. Note the chart goes back to 1975 and the soft data index (orange) is just off its 35-year high set two months ago, and just below its all-time high set in 1983. The aggregate of the soft data index is booming.

A large positive spread (bottom panel) is often the case when both the soft (orange) and hard (blue) indices are below zero, indicating the economy is struggling but hope remains. We have a unique situation where soft data is far stronger than the hard data index during a period of strong economic growth.

Economic Surveys Are a Danger to Investors

Overtly positive surveys are translating into stellar projections up and down Wall Street.

The next chart shows the median Wall Street estimate for S&P 500 revenue (sales) growth, which is less distorted by the corporate tax cut affecting earnings. The overall S&P 500 revenue estimate (blue line) is projected at 7.49 percent higher than a year ago. Remove the financial stocks (green line) and it’s an eye-popping 8 percent higher.

Economic Surveys Are a Danger to Investors

So, what’s the problem?

The next chart shows the soft data index (x-axis) versus hard data index shifted three-months ahead (y-axis). In other words, how well does soft data predict the next quarters actual economic growth? Highlighted on the chart is the regression lines for three different periods.

Since 2008 (blue line) the relationship between the surveys and what comes next for the economy has been tepid at best. On the contrary, the relationship was convincingly positive between 1974 and 1995 (orange) when political differences were not as emotional and digital news feeds nonexistent. These distant decades are also when many of our prized Federal Reserve economists were studying soft survey data for their Ph.D.s. Old habits are hard to break.

Economic Surveys Are a Danger to Investors

Productivity remains an enigma given the many moving parts of demographics, technology, and globalization. The chart below shows the soft data index (x-axis) versus productivity (y-axis). Again from 1974 to 1995 soft data and productivity gains showed a relationship. However, this dynamic seemingly ended with the financial crisis (blue).

Economic Surveys Are a Danger to Investors

Finally, if the soft data should be doubted, the next chart is not easily dismissed as a coincident or lagging indicator. Each colored line represents the Citigroup Data Change Index by country or region. Above zero indices indicate incoming data releases are above one-year trailing averages.

Europe has quickly lost momentum, falling below zero for the first time since late 2016. Unfortunately, all but the U.S. are posting economic data below one-year averages. All are in a downtrend.

Economic Surveys Are a Danger to Investors

Bandwagon biases and political polarization have soft survey data near their highest levels in 35 years. Wall Street has been racing to keep pace by providing eye-popping forecasts. 

But we have a problem in surveys failing to accurately predict coming economic growth and inflation. Bullish surveys for the economy have seen less and less realized improvements over time. Their relationship since 2008 have been tepid at best.

The stock market is seemingly calling the surveys’ bluff. The S&P 500 is unchanged for the year and at a loss halfway through the spectacular first-quarter 2018 earnings season. Are investors sensing disappointment is around the next corner?

To contact the authors of this story: Jim Bianco at, Ben Breitholtz at

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