The Trouble With Surveys

What do German business execs, US economists and US small business owners have in common? Like, beyond the fact that they're all getting top-billing in the financial press because it's a slow news day? Apparently, they all have the blues. German bigwigs believe their economy is "losing steam." Fewer economists think US economic policy is on the "right track," and more think it needs big "structural changes." Two thirds of small business owners are pessimistic about future financing. But before you assume this all means the world economy is teetering, a caveat: These gloomy takeaways come from surveys. Not facts. Surveys aren't useless, but they also don't tell you what will happen, and we'd suggest investors take them with a big grain of salt.

To see why, let's look at the three surveys making news today-starting with the economists, who appear about as dismal as their field's colloquial name would imply.^[i]According to the National Association for Business Economics' (NABE) latest poll, only 53% believe "US monetary policy is on the right track," which is more than half (yay?), but also fewer than the 57% who gave the thumbs up six months ago. Thirty-six percent say the government should use "structural policies" to address the "rise in long-term deficit-to-GDP ratio," compared with 20% in February.^[ii] In short, it would seem more of the "experts" think the US is moving in the wrong direction.

Problem is, this survey doesn't account for the elephant in the room: economists' biases. Many economists aren't any more objective than other pundits. Those who believe in demand-side economics-who believe policies that boost consumer demand are the best way to drive growth-might be feeling sour simply because there is less quantitative easing (QE). Even though numerous economic indicators show the end of QE isn't bad, and the yield curve has steepened since Ben Bernanke first hinted at "tapering" Fed bond buying in May 2013. If your bias is pro-demand-side, then you're biased to hate the taper. On the flipside, adherents of supply-side economics-the school of thought believing if folks can create and produce freely, demand (and growth) will fall into place-are probably apt to be among the 39% saying policy is "too stimulative," because they'd prefer the feds just get out of the way and let the private sector do its thing.

In short, the NABE survey doesn't yield an actionable analysis of US economic policy-it just tells you how 257 economists feel. There is no way to know whether those feelings and opinions are rational reactions to facts-or colored by bias, differing interpretations of the questions or their mood at that time.

The German survey, too, is simply a snapshot of feelings and opinions. The IFO Institute's Business Climate Index fell for the fourth straight month, hitting its lowest level since July 2013, and the accompanying note from the institute's president interpreted German businesses' skepticism as a sign Germany's "economy continues to lose steam." Except it isn't, not really. The downturn in sentiment started about when the tiny downturn in German GDP started-the beginning of Q2. All the survey shows is how execs felt about whatever they saw around them at the time they were polled-which would probably be a few slowing indicators and fearful headlines regarding rising tensions between the West and Russia. Neither of which is really news or forward-looking-emotional reactions to past data don't predict the future any more than the past data do. Ditto for businesses' sanctions jitters-businesses are run by people. People who have the same emotional reaction to embargoes as everyone else. They could very well (and probably will) be pleasantly surprised by just how little these sanctions bite in real life. All their fears tell you is where sentiment is today.

Our final survey-the small business lending questionnaire-isn't new, but it was highlighted in a piece warning of some of the drawbacks of the "alternative lending" some small businesses have resorted to in recent years. And there was a nifty graphic-and said nifty graphic shows pretty perfectly why it's tough to draw many meaningful conclusions from a survey. Some of the answers contradict each other! For example: 66% of those surveyed said the "business climate is tough for raising new financing." But 54% had no trouble getting a loan, which to us suggests quite a few of the "it's tough!" crowd were just feeling down in the dumps. It's sort of like the many, many times we've seen US consumer confidence surveys tumble in a given month, only for actual data to show retail sales and consumer spending grew. People's feelings frequently don't match reality.

Surveys do have their uses. They help show sentiment, which is a key market driver. But that's about where their contributions to market forecasting end. A readout of folks' feelings, opinions and biases has no bearing on where the economy goes next.