KEY DATA: Sentiment: +5.2 points; Expectations: +8.6 points; Current Conditions: +0.1 point/ LEI: +0.2%
IN A NUTSHELL: “Hopes for the future run high, but that was before the trade war went nuclear, so let’s wait and see where things stand.”
WHAT IT MEANS: Consumers will drive this economy and it looks like they are quite exuberant – maybe. In the first part of May, the University of Michigan’s Consumer Sentiment Index hit its highest level in fifteen years, led by a surge in the expectations index. But the report indicated that most of the data were collected before the trade talks collapsed. The numbers coming in afterward were a lot different, with expectations much weaker. This is especially important since the current conditions component was largely flat. So, before we celebrate a consumer that is as happy as can be, let’s see what happens when the final numbers come out on May 31st.
Looking ahead, the Conference Board’s Leading Economic Index rose moderately in April. After having pretty much flattened early in the year, the index is moving back up. However, the rate of rise points to more moderate growth in the near future, which is in line with what most economists and the data are forecasting.
MARKETS AND FED POLICY IMPLICATIONS: The markets reacted quite negatively to the raising of tariffs and will likely do the same if the tariffs on Chinese goods are broadened. But after thinking it over, investors seemed to decide that it was just a “never mind” moment. I am not sure what investors are thinking or even consumers and that is a concern. Do people think that tariffs don’t matter? Really? If so, then you can describe the current consumer confidence numbers and the behavior of the markets as showing signs of irrational exuberance. Even worse, if tariffs don’t matter, what would stop our trading partners from putting tariffs on our goods and why would we not do the same with Europe and/or Japan. Those nations may not be as egregious in their trade restrictions as China, but they have some pretty significant ways of controlling trade as well. Do we really want to go down that road? The trade situation undoubtedly will add even more volatility to the already volatile data. That makes the Fed’s “data dependency” not much different than a roller coaster. The Fed members need to buckle up, because things could get really crazy in the next few months.