There has been a spate of pretty negative reports on business and consumer confidence. Some people are very skeptical of surveys. As a Michigan man who spent many hours at the Survey Research Center, I have respect for surveys that include strong design and execution. Most of the complaints you hear come, as usual, from people who never took a single course in survey research.
I understand that the value of surveys can range widely. Since some of the recent results (Philly Fed, the new Markit flash PMI, consumer confidence) are moving the market so dramatically, it is a good idea to take a deeper look.
I have been monitoring this theme for a long time, but some recent results are of special interest. There are two key themes, explored below.
The "Us versus Them" Disparity
Responses to surveys vary dramatically depending upon whether the respondent is discussing his/her own situation or that of others. I have many examples, all showing the same thing. The results below are indicative.
- McKinsey does a respected global economic survey. There are many results that deserve your detailed consideration. You can see the entire report if you do a free registration. Here is the key point:
"...(E)xecutives remain optimistic about their companies’ prospects. Only 15 percent say customer demand for their companies’ products and services will decrease, and more than half expect profits to increase in the next six months. But this optimism does not extend across all regions and industries: larger shares in India and in the manufacturing sector now expect demand to decrease than did in March."
- Businesses worry about others. Here is a nice chart from the Duke survey of CFO's. The difference between one's own company and the overall economy is obvious. It has become a regular part of the economic landscape.
- Personal spending expectations are down only slightly, despite the overall concern about others.
The "Future versus Now" Disparity
Responses vary dramatically depending upon whether the respondent is discussing current conditions or what he/she expects to happen in the future. I have many examples, all showing the same thing. The results below are indicative.
- Consumers worry about the future.
"While consumers’ expectations declined, consumers’ views on the present situation rose in June. Overall, the data suggest that there may be “little change” in the pace of near-term economic activity, Franco said."
- Businesses also worry about the future.
Here is what they say about their own business prospects:
“The Duke-CFO survey measures plans for the next 12 months, which is in contrast to the Bureau of Labor Statistics’ assessment of the employment situation, which measured a single month: May,” said Kate O’Sullivan, editorial director at CFO Magazine. “In contrast to the BLS number, CFOs indicate a level of hiring that would reduce the national unemployment rate to near 7 percent within a year, if all else remains constant.
“More than one out of four U.S. CFOs say their employees are maxed out, so the planned increase in payrolls is long overdue,” O’Sullivan said.
But they are still worried about future conditions.
Conclusions from the Data
When asked about their own situations, both consumers and businesses are more positive than when asked about others. Which response do you think reflects the more informed reply?
When asked about the future versus now, both consumers and businesses see some comfort in future conditions but are worried about the future. Which response do you think reflects the more informed reply?
I hope the answers to these questions are as obvious to readers as they would be to an expert on surveys.
The investment community looks at the "headline numbers" without asking much about the details. Businesses and consumers, despite their own success, read the same newspapers as everyone else. The effect of the constant drumbeat of crisis stories has an effect.
Perceptions Become Reality
One of the key problems is that mistaken perceptions can become reality -- a self-fulfilling prophecy.
There is plenty of evidence about this concern.
"Top executives are increasingly worried about potentially big changes in U.S. tax and spending policies in 2013— the so-called fiscal cliff — as well as the spillover effects of the financial crisis in Europe.
The Roundtable’s chairman, Boeing BA -0.17% CEO Jim McNerney, said all the uncertainty is causing “paralysis” among businesses as the end of the year approaches. Some are even cutting jobs until they have a clearer idea of how the fiscal cliff and European crisis will be resolved." (Marketwatch)
US businesses are moving funds out of European banks and taking other preparations. (Reuters).
Two ideas leap out -- and both are important.
- Conditions are not as bad as the headline numbers suggest.
- The failure of leadership is creating a negative climate. Some of this failure can be laid at the doorstep of specific leaders, but much of it is a natural fallout of the US election cycle and the ongoing negotiations in Europe.
There is a danger that the delays in the political process will make things worse. There is also an opportunity, since any change in perceptions could stimulate economic growth. More confidence leads to more investment and more spending.
Monitoring this will help investors make decisions about cyclical stocks, tech stocks, and financials. Recent favorites I have mentioned include CAT, AAPL, and JPM, but these are only examples.