The Limitations of Confidence

I disagree with Neil Irwin’s interpretation, expressed here at his Upshot feature, of the discrepancy between the various confidence indices and the performance of the economy:

After Donald J. Trump won the presidential election, Americans’ optimism about the economic future soared. But midway through the year, that optimism has not translated into concrete economic gains.

This seeming contradiction exposes a reality about the role of psychology in economics — or more specifically, how psychology is connected only loosely to actual growth. It will take more than feelings to fix the sluggishness that has been evident in the United States and other major economies for years. Confidence isn’t some magic elixir for the economy: Businesses will hire and invest only when they see concrete evidence of demand for their products, and consumers intensify their spending only when their incomes justify it.

What I believe the discrepancy illustrates is just how far separated the financial economy has become from the real economy and that CEO confidence levels in particular are nearly entirely predicated on the financial economy—which makes sense when you recognize that’s where most of their pay comes from.

As to his claim about businesses hiring and investing, etc. it would be nice to think that but that isn’t the case, either. There’s been plenty of consumer spending (if you like nominal PCE better that’s here). Domestic hiring and investing have lagged anyway. In a globalized world with lots of domestic retail overcapacity more spending doesn’t translate into domestic hiring and investing.