Sentiment and Real Activity

Sentiment indicators have been unequivocally poor in the US, but real sector data appears to be faring somewhat better.   This point is underscored by today's releases of the July Chicago Fed's National Activity Index.  The market expected a -0.48 reading and it came out at -0.06.  This actually represents an increase from the upwardly revised June reading of -0.38 (initially -0.46).   It bottomed out in April.  This would suggest talk of a renewed contraction in the US economy to be premature. 

When it comes to core inflation and headline inflation, the historical record is clear.  Headline inflation, over the past 30 years or so, have converged with core inflation, rather than the other way around.  It is not so clear about the sentiment readings.

Note that the ISM's did not give any hint the US economy was grinding to a halt in Q1.  The manufacturing reading rose above 60 in the Jan-April period and the service ISM 3month moving average moved to 58.8 at the end of Q1 from 55.9 at the end of Q4 10.  

Consider the Philly Fed which was so horrifically shocking last week (-30.7 in Aug from -3.2 in July).  It had risen from 20.8 in Dec to 43.4 in March.   

This is not to justify a pollyannish view of the US economy.  It just raises the point that the real sector appears to be holding up better than sentiment.  Can sentiment become a self-fulfilling prophesy ?  You bet.  Must it ?  No.  This does not mean that the US economy is booming, just that the speculation of a new recession or a double dip is not necessarily a done deal either.     While the Fed needs to downgrade its growth forecasts (due in Nov), it is unlikely to forecast a new contraction.  It would not be surprising if Bernanke drew people's attention to this discrepancy between sentiment and real sector data in his Jackson Hole speech.