Sentimental Journey

Like a good attorney, we rarely ask a question for which we don’t have the answer. In the case of looking at sentiment in the economy and in the stock market, we like watching to get a feel for what our professional and individual investor clients are going through to see if it matches what we are hearing and seeing. The bifurcation in the economic sentiment surveys is that sentiment and confidence in economic growth are high, but those enthusiasms have yet to show up in real Gross Domestic Product (GDP) growth. 

Source: http://www.valuewalk.com/2017/04/economic-data-hard-data-soft-data/

There appears to be two possible outcomes from the divergence between economic hopes and, on the ground, economic growth. The first possibility is that we continue to muddle along with anemic economic growth of 1 to 2%, and make the sentiment appear like a false signal, akin to prior spats of enthusiasm. Or, alternatively, the shift in U.S. demographics and significantly higher household formation may begin to positively impact economic growth. How can a logical person be positive about economic growth over the next ten years?

To be positive on economic growth you must believe that experts have significantly underestimated the negative impact home building has had over the last eight years. Here is how Ivy Zelman, a highly thought of housing analyst, explained these circumstances to Barron’s in 2016:

This cycle will be elongated, and the slope of the recovery is flatter than what we thought the trajectory would look like when we called the bottom in 2012. Builders have been slower to see the growth. There’s a shortage of shelter. We’re pretty indifferent whether shelter should be owned or rented. We’re just saying there isn’t enough. The U.S. is at a 30-year low of inventory available for sale. We are predicting double-digit housing-starts growth this year, next year, and in 2018.¹ 

Wouldn’t experts be likely to underestimate its positive affect going forward? The difference between past economic recoveries and today’s recovery is the contribution made by home construction and improvement. Could the engagement of 25 to 35-year old Americans in the housing market be causing confidence in the future, but not yet show up in the GDP statistics? In a report on CNBC, April 24, 2017, Diana Olick reported the following: