Economists utilize two main categories of data: 'hard data' and 'soft data.' Hard data consists of quantifiable, objective measurements of economic activity, such as pricing, spending, hiring figures, sales volumes, job listings, factory production levels, U.S. jobs data, inflation reports, and Gross Domestic Product (GDP) readings. This type of data provides a factual basis for analysis and is typically backward-looking, often with a time lag in reporting.
In contrast, 'soft data' primarily comprises survey results that reflect the sentiments and expectations of consumers and business leaders. Examples include consumer sentiment surveys (like the University of Michigan Consumer Sentiment Index), small business confidence, home builder sentiment, and Purchasing Managers Index (PMI) surveys for manufacturing and service sectors. Soft data is important because sentiment can influence future actions; for instance, worried consumers may reduce spending. This type of data is often forward-looking and can act as a "trip-wire" to signal potential shifts in the economy before hard data reflects them.
Recently, there has been a notable divergence where soft data, particularly consumer sentiment, has shown deterioration, while hard data, such as job growth and retail spending, has remained relatively strong. This situation has led to discussions among economists about whether the weakening sentiment will eventually manifest in the hard data. Some analysts, like Oren Klachkin of Nationwide Financial Market, anticipate that negative sentiment will eventually feed into hard data, leading to softer spending.
The timing of this potential shift is a key point of discussion. Historically, in instances where soft data shows weakness, hard data has often followed suit within approximately 60 days, though some suggest a lag of $50 to $80 days. Factors like policy shocks, such as tariffs, can distort this timing, as businesses might accelerate spending to "front-load" purchases before new duties take effect. Economists emphasize the importance of analyzing both data types in tandem to make more informed decisions, as relying solely on one can provide an incomplete picture. Despite the current resilience of hard data, the sustained weakness in soft data leads some, like Apollo Chief Economist Torsten Slok, to expect a spillover into hard data in the coming months.
