History has a habit of repeating itself. We often hear “it’s different this time” only to find that events at least rhyme if not repeat the past. A good example is US GDP data: Q1 GDP data has been weaker than expected in the US in each of the last few years and it proved to be so again this year. The latest GDP report showed only 0.7% growth on an annualised basis – which was below the consensus forecast of 1%, even after downward revisions to those expectations in recent weeks. This was the latest in a series of data “misses” in the US so far this year.
Interestingly these disappointments have occurred as economic data elsewhere has remained robust. The chart below shows the difference between the economic surprises in the US compared to Europe (how many data releases come in either above or below the “official” consensus).
Source: Bloomberg as at 2 May 2017
So what’s going on? Is the US now lagging Europe? The answer is “not necessarily” – it has a lot to do with the level of expectations. The optimism that followed the US election pushed both consumer and business confidence surveys to multi-period highs and left expectations overblown. The inevitable normalisation in this “soft data”, along with some misses on the hard data side, has driven the surprise indices lower.
In Europe the opposite is true – expectations have been so depressed for so long that the recent uptick in data (from a low base) has been enough to beat the consensus. This feels like the start of the European economy entering into a new phase where investors will need to be focussed more on upside rather than downside risks.
For the US, it’s not all doom and gloom. The Fed commented last night that they see the weaker data in Q1 as “transitory” with their growth forecasts still in place. With expectations having been pared back in recent weeks, maybe the scene is set for the US economy to now surprise on the upside.