After the U.S. presidential election, the stock market showed a clear “Trump bump” in anticipation of more business-friendly economic policy. Small business investment also surged in response to Trump’s campaign promises to roll back regulation and reduce taxes. But consumers? They didn’t seem to be as confident about the future.
Ebullient U.S. consumer confidence remains one of the best tracking indicators of the current business cycle. The rebound after the steep drop during the last recession coincided well with the downturn in the unemployment rate. Sentiment improved until late 2014 when consumer confidence appeared to stall out.
{mosads}Economists look at two confidence surveys to measure sentiment in the household sector: The Conference Board index and the University of Michigan survey.
The Conference Board polls about 5,000 people, once a month, while the University of Michigan surveys about 500 people throughout the month, publishing a preliminary estimate early in the month and a final release toward the end. These two surveys don’t always tell the same story, though, providing a source of frustration for data watchers.
Starting in November 2016, the month of the election, the Conference Board index followed stocks and small business confidence higher and, by March, had reached the most bullish level since the end of 2000. While the index has given back a little ground since then, it has continued to trend at levels higher than at any stage in the current or previous business cycle.
The University of Michigan index, however, showed no meaningful Trump bump. Sentiment improved a little, but it remained very much within the previous trend channel.
That changed last week when the University of Michigan index finally broke out of that 33-month trading range and improved to the strongest level since early 2004.
Before we get too excited, here is a necessary disclaimer: This is just one monthly data point, and we would want to see confirmation of a stronger trend in the next few months. Yet, rising consumer sentiment is a vote of confidence in the U.S. recovery and bolsters forecasts of accelerating U.S. economic growth.
The diverging trends may also hint that it’s not just a Trump bump driving confidence indexes, but consumers’ perception of actual improvements in the underlying economy. Job growth continued at a robust pace through the first half of 2017, and the unemployment rate continued to drift lower without affecting confidence noticeably.
What may be changing now (and what the University of Michigan index may be picking up) is an acceleration in wage growth. It’s still too early to call this a new trend, but the last U.S. employment report included a stronger-than-expected increase in average hourly pay, which grew at an annual rate of 2.9 percent in September. That was the fastest pace — albeit only by a tiny margin — in the current business cycle.
If consumer confidence is indeed reacting to an uptick in wage growth, it would support our view that the U.S. economy is transitioning from a state of excess supply, which was deflationary and depressed business investment, to one where supply and demand are more in balance.
The result is a pickup in business investment as companies seek further growth. However, it also implies companies are forced to pay higher wages to attract the workers necessary for that growth.
We have already seen the evidence for a turn in business investment. Last month’s wage data and this latest consumer confidence index may be the first pieces of evidence that increased business investment is also forcing companies to raise compensation.
Economists aren’t the only data watchers paying attention to this. The Federal Reserve would be bolstered in its view that the economy warrants further gradual rate hikes. We won’t have conclusive evidence that wage growth is transitioning to a faster pace before the December Federal Open Markets Committee meeting.
Yet, mounting evidence that the economy is shifting to a faster growth pace should be enough to convince a majority of the committee members to deliver a third rate hike this year.
Markus Schomer is the chief economist at PineBridge Investments, a private, global asset manager focused on active investing. As of June 30, the firm managed $85.5 billion across global asset classes.