Irrational Optimism

In the months following the election, we saw optimism surge higher in a number of prominent indicators…

Homebuilder sentiment hit an 11-year high.

Small Business optimism hit a 12-year high.

Consumer confidence hit a 13-year high.

Philadelphia Fed Manufacturing survey hit a 33-year high.

The thinking was as follows: a new era of higher economic growth was about to take hold, driven by lower taxes, deregulation and massive infrastructure spending. It was said that 5% real GDP, a stronger U.S. dollar, higher long-term interest rates, and higher wage growth were coming.

Reinforcing this belief was the booming stock market in the U.S., hitting new all-time highs on a daily basis and doing so with just about the lowest volatility in history.

Fast forward to today and the stock market continues to hit all-time highs with record-low volatility, but something interesting is developing with respect to the aforementioned levels of optimism. They are starting to move back down…

Small Business optimism has moved down to its lowest level since last November.

Consumer Confidence has moved down to its lowest level since last October.

Philly Fed Manufacturing Survey has moved down to its lowest level since last November.

But these are just surveys. Perhaps the real economic data is painting a different picture. Let’s take a look…

In the first quarter, Real GDP came in at 1.4%. In the second quarter the Atlanta Fed is projecting 2.5%. The average of the two, 1.95%, is below the expansion average of 2.2%.

In the first six months of the year, the U.S. added an average of 180,000 jobs per month (non-farm payroll report). In the prior five years, the U.S. added an average of 214,000 jobs per month.

In the first six months of the year, U.S. Retail Sales rose at an average pace of .07% per month. Over the prior five years, the average rate of growth was 0.29% per month.

In the first five months of the year, Real Personal Income grew at an annualized rate or 1.89% per year. Over the prior five years, it grew at an average rate of 2.28%.