Confidence matters. It is an essential ingredient of any economy, and its financial, political and social systems. When it’s there, it’s almost invisible; it operates in the background, and is generally taken for granted. Upset it, and you know right away—economic wobbles are virtually guaranteed. So, with all the media concern about slowing growth and political uncertainty, what are the gauges of confidence telling us?
To some extent, it depends who you’re asking. Consumers sometimes have a very different take on things than businesses. Their concerns are largely about today. If job growth is fine, wages and salaries are rising at a decent clip and there are no real clouds on the near-term horizon, they are quite happy to go out and spend. Businesses have a longer view. They have to make big bets on facilities and machinery that require steady conditions at least over a five-year horizon.
If we looked only at U.S. consumers, we’d have to conclude that the world is just fine. Confidence there might have slid in the last quarter or two, good for a fleeting alarmist comment, but the level of the two main indexes is still near a cyclical high. Small wonder—the job market is tighter than at any time since the Great Recession, and job gains are rising decently every month. Responding to conditions, wages are rising steadily.
The U.S. business view is quite different. Manufacturers’ collective views of the six-month horizon dipped into negative territory in August, for the first time since late 2015. New orders also dipped into the red, and were this low only once since the Great Recession. The trajectory is decidedly downward, suggesting no near-term relief. Production is responding; the bleak outlook and tepid orders are slowing factory activity.
Does Europe agree? Actually, its consumers are on a different page than Americans. Their sentiments softened significantly through 2018, and have since only managed a marginal improvement. This comes in spite of a steady decline in the EU eurozone unemployment rate to a cyclical low of 7.4%. Times may be good now, but Europeans seems to see a different future.
Maybe they are more in touch with their overall growth situation. Or maybe they are just closer to their businesses. As a collection of more intensive trading economies, Europe can be forgiven for being more sensitive to movements in the outside world. With economies like Germany slowing significantly, the headlines are not great. And business confidence is reflecting just that. Since early 2018, it has been in what looks like a freefall. Industrial confidence is at its lowest level since 2012, with both overall and export orders showing a very similar pattern. The service industries, typically more resilient, are also on a downtrend. The construction sector is more upbeat, but usually takes longer than the average business to react, as many projects have long lead times. And in spite of consumer blues, strangely, European retailers also have a brighter view of things.
Here in Canada, our views are more American than European: consumers seem sanguine about conditions, whereas businesses are a bit more edgy. Where does this leave the world? Well, softer confidence doesn’t necessarily mean weaker future economic growth. Businesses are clearly citing global trade tensions as a key factor in their increasingly gloomy take on things, and this factor is also not far from the minds of consumers. It again underlines what could be accomplished by a rapid reconciliation of the world’s major trade impasses, and underlines our view that current weakness is all very avoidable.
The bottom line?
Confidence may be getting creaky, but a large chunk of the world’s wealthiest consumers don’t agree. They may eventually end up aligning with the rest, but for the time being, they will likely continue spending in a business-as-usual way. Businesses see darker clouds, and are likewise closing their wallets. It’s simply too risky for them to make that next bet before knowing where things are going. Confidence measures are at a key tipping point, increasing the pressure on a handful of decision-makers. The drama continues.
