US consumer optimism is surging, and may reflect the stock market outperformance, Paul Krugman wrote.
But stocks aren’t a good indicator of future economic health, and should be ignored.
Americans give outsized attention to equities due to the market’s high visibility.
With stock bullishness swinging indexes towards new highs, consumers are feeling much more optimistic about the economy, Nobel economist Paul Krugman wrote for The New York Times.
But Americans are mistaken in equating market upside as a sign of broader good news, and should dismiss it as a meaningful indicator of macroeconomic health.
In January, the University of Michigan’s Consumer Survey saw a 13.1% month-to-month jump, marking its highest level since 2021. Alongside this, the S&P 500 climbed 7.2% since December’s start, topping a fresh record last Friday.
“What should we make of the surge in consumer sentiment? On the one hand, it makes a lot of sense given the reality of an economy with low unemployment and inflation,” Krugman wrote. “On the other hand, the timing may have been driven by a financial indicator most Americans really should be ignoring.”
He says stock markets have a historically poor track record of correctly forecasting the future economy.
For instance, previous equity crashes have been hailed to signal an impending recession, only for the pessimism to end up misguided. Examples include the 1987 downturn, and 1998’s bear market, Krugman wrote.
There’s a few reasons stocks make bad forecasters, he said, such as that they’re often guided more by human sentiment than rationality and will rise and tumble with no real purpose.
That may be the case today, as the current rally is hinging on strong hopes of a monetary policy pivot, despite hawkish rhetoric among central bank officials.
What’s more, a mounting recession could actually help boost stocks, as the Federal Reserve would try to limit a hard landing with interest rate cuts. Of course, this would be balanced out by falling profits, a market headwind.
Added, a majority of Americans don’t have the type of market exposure to justify the large boost in consumer confidence. With the median household owning $52,000 worth of stocks, gyrating share prices have a limited direct effect on consumer finances, he said.
To Krugman, the reason consumers put an outsized emphasis on the market is given its high visibility.
“The latest move in stocks is constantly showing up on your TV or your smartphone, in a way other economic data isn’t,” he wrote. “So it’s somewhat natural for people to judge the economy by the numbers they see all the time.”
Read the original article on Business Insider