4 different ways of looking at the exact same economy 🪖👒🎩🧢

Plus a charted review of the macro crosscurrents 🔀

An AI-generated image of four people debating the economy.

Stocks climbed last week, with the S&P 500 gaining 1.8% to close at 4,783.83. The index is now up 0.3% year to date, up 33.7% from its October 12, 2022 closing low of 3,577.03 and down 0.3% from its January 3, 2022 record closing high of 4,796.56.

Often times, those discussing what’s driving the stock market will appear in conflict with those discussing what’s driving the economy. And sometimes, those discussing what’s driving the economy will appear in conflict with each other.

These diverging views will happen even though everyone is in total agreement about the validity of the measurable data they’re citing.

How is this possible?

I think we can begin to disentangle what’s going on by thinking of people as wearing one of many different hats. There are at least four important hats that are worth a closer look.

The hard data economy hat 🪖

Hard data is anything that reflects quantifiable and observable behavior — stuff that is actually happening. Think job creation, wage growth, industrial output, retail sales, government spending, imports and exports, and consumer prices. There are receipts for all these things.

These include metrics that help us determine whether or not the economy is in expansion or recession.

We may actually need to divide this hat into two hats depending on how you measure economic activity. Some say the direction of the economy is reflected in two quarters’ worth of GDP, which relies strictly on monetary values of activity. Others go by the official NBER definition of activity, which considers non-monetary metrics like changes in employment.

While the GDP-oriented economy observers have perspectives that differ from the NBER-oriented observers, they at least agree that the activity is based on hard measures. It’s just a matter of how they weight those measures.

“What recession?” economist Justin Wolfers asks. (Source: @JustinWolfers via TKer)

Generally speaking, hard data metrics have been favorable — mostly reflecting a growing economy.

For more, read: The economy has gone from very hot to pretty good 😎 and You call this a recession? 🤨

The soft data economy hat 👒

Soft data is generated through surveys of consumers and business operators expressing their opinions, feelings and expectations about things like job security, financial health, inflation, future business activity, and labor quality. They’re measurements of stuff people feel is happening or feel will happen.

Popular reports capturing soft data include the New York Fed’s Survey of Consumer Expectations, the ISM’s Manufacturing PMI, the NFIB’s Small Business Optimism Index, and the University of Michigan’s Surveys of Consumers.

Soft data reflect the vibes, as Kyla Scanlon would say.

Recently — despite robust hard economic data — the economic vibes haven’t been great, as consumer and business sentiment have spent most of the past two years in the dumps.

Small business sentiment has been poor. (Source: NFIB)

Does this mean we should dismiss the sentiment data?

Of course not.

What good is it to have lots of money and to buy everything you want if you’re more unhappy than you were when you had less money and less stuff?

For more, read: A bullish contradiction 🛍 and What businesses do > what businesses say 🙊

The stock market hat 🎩