The Dangers of Reading Into Economic Signals

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By Jacob Maslow

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Consumer confidence is rising

For the most part, economic signals are neither all positive nor all negative. This is what makes them dangerous. Analysts would often look at data sets that support their pre-existing opinion. They would gloss over negative information. Not surprisingly, economic data is highly susceptible to this kind of selective reading and analysis. Unfortunately, this practice is so pervasive that it impoverishes all of us as far as deep, accurate, and fundamental awareness of economic realities is concerned.

Take the US economy last quarter, for example. The sad reality is that the growth rate of the US economy slowed sharply. We’re not talking about like a slight dip. We’re talking about a sharp turn downwards. The main driver of this negative development is weakening business spending. Businesses are not looking optimistic in 2015. When businesses don’t spend as much, they don’t hire as much, and this has a domino effect on the rest of the economy.

However, if you are an optimistic analyst who is looking to paint a bright picture of the economy in 2015, you wouldn’t look at growth rates; instead, you would look at consumer spending. Granted consumer spending did rise by 4.3% in the fourth quarter; however, you have to understand why this is the case. First, people are paying less at the pump. Second, there are a lot of jobs being created. While most of these jobs are lower-paying jobs, they are still jobs. Put these all together and consumers are increasing their spending. Consumer confidence is also rising.

The problem with concluding that the US economy in 2015 will be very positive arises from the nature of these figures. Consumer spending and consumer confidence are often at the tail end of the economy. So the economy may have changed dramatically for the worse, but consumer spending and confidence might still be high. It’s very easy for these economic factors to run on fumes. Unfortunately, you don’t get this picture when you look at the analysis of highly optimistic or highly bullish analysts. Make sure you look at economic reports holistically.

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