Should we really be disappointed?

Posted by: Paul Donovan

16 Apr 2021

Weekly Updates

  • The economic bounce-back keeps surprising the consensus by being stronger than expected. Recent industrial production data has not followed this trend, however. While the numbers have generally signalled solid growth, they have tended to disappoint expectations. Why is this?
  • In the second quarter of 2020, manufacturing sentiment indicators predicted a complete catastrophe. Production sentiment numbers were at extreme lows and did not signal growth until June or July. The reality was that production started improving in April or May, the improvement was strong, and the data was better than expected. Using sentiment data in forecast models had generated too much pessimism in production forecasts.
  • It seems likely that the world today is a mirror image of the second quarter of last year. The excessive pessimism of manufacturing sentiment data then has been replaced by wild optimism in manufacturing sentiment data now. The US ISM production sentiment is at levels not seen for over seventeen years, even though the production recovery is quite long-established.
  • In the coming months sentiment data should converge with reality again. This sentiment decline should not be taken as a signal that the economic bounce-back is necessarily fading. It should, however, reduce the number of negative surprises to the real world data. 

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