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It's a Confidence Thing

Sentiment tends to drive behavior. As people feel more confident in their outlook for their sports team, their country, their job/business, or the economy, poeple are usually willing to spend more and even take more risk.

Economic and business confidence therefore can be a good indicator of the prospects for growth. Currently, business and economic confidence are back near their pre-pandemic levels. The chart below shows the US NFIB Business Confidence and the US IBD/TPP Economic Optimism levels and their rapid climb over the last 3 months.

Similarly, Consumer Sentiment is also climbing, though lagging both business and economic sentiment as shown in the chart below. The lag is not unusual, more important is the directional move and climbing consumer sentiment.

The directional rise in consumer sentiment is important because, as we mentioned earlier, it leads to the confidence for consumers to spend more. In the US, 65-70% of the economy is driven by consumer spending so when spending rises, so does GDP and tax revenue at all levels. In the chart below, we can see the relationship between consumer sentiment and retail sales over the long term.

The positive trend in sentiment at all levels is very encouraging. Should it continue the return to the pre-pandemic level of GDP could happen rather quickly.

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