The Economic Data Is Already Starting to Beat Expectations Again

One of the big themes of the last year has been that almost everyone has been too pessimistic about the economy and corporate fundamentals.

The easiest way to see this is by looking at an economic “surprise index” which attempts to gauge the degree to which the data is beating or missing economists’ forecasts. It’s not a gauge of absolute strength but of relative strength. For about a year now, the Citi Economic Surprise Index for the U.S. has been in positive territory. That means this whole time, despite all the stories about the rebound, and the strength of the recovery and the powerful impact of the fiscal response, economists have been too pessimistic.

The Economic Data Is Already Starting to Beat Expectations Again

Only very recently in the middle of May did the white line drop ever so slightly below zero, indicating reality more or less meeting expectations. But now it’s already on the rise again as you can see at the end of the chart.

Just today we got better-than-expected ADP labor data, initial jobless claims, Markit PMI, and ISM services. They all beat. Not by huge amounts, but it was across the board.

The narrative is also changing going into tomorrow’s Non-Farm Payrolls report. As Neil Dutta of Renaissance Macro noted earlier, when you see ADP indicating nearly 1 million jobs gained in the month, it gets harder to say that there’s a worker shortage. Furthermore, as more things normalize (fewer restrictions, schools opening etc.) some of the existing constraints on labor may fade away.

Also it’s interesting to note that, while the labor market shows some tentative signs of easing (though we’ll see with NFP tomorrow), markets are indicating less anxiety about inflation.

Five-year breakevens are actually below where they were in the middle of March, having faded substantially since early May. 

The Economic Data Is Already Starting to Beat Expectations Again

Speaking of excessive pessimism, it wasn’t just economists and stock investors. 

Here’s what Bank of America published yesterday about credit ratings: “Our methodology shows a record $127.8bn of net credit ratings upgrades in May, accounting for the number of notches of ratings changes as well as incorporating outlook and review revisions.”

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