| Posted by: Paul Donovan | Tags: Paul Donovan Weekly
Business sentiment data are popular in both markets and media. Sentiment surveys continue to rank as some of the most important data items for investors. But central bankers almost never mention sentiment surveys. Why is this?
Business sentiment surveys have several problems. Economic relationships are not stable. Sentiment data does not have a stable relationship with the real world. People who fill in sentiment surveys are, by definition, weird. People do not usually agree to fill in surveys. Those that do fill in surveys are not typical. Survey results are used for lobbying purposes. People may answer surveys to try to influence policy.
Investors and media use surveys badly. Surveys are frequent data releases. These attract more attention than they deserve. There is a lot of data in a survey. Investors can pick the bits that confirm their view of the world, ignoring the rest.
Survey data tends to overreact relative to the underlying economy. Most survey data has become less accurate as a predictor of economic activity, although employment and pricing measures are still relatively accurate.
Investors' focus on sentiment means markets may have a different, unrealistic view of the world compared to central bankers. Central bank tightening in 2018 may be underestimated by markets.