In their March meeting minutes, the Federal Open Market Committee indirectly touched on the “hard data versus soft data” debate that’s been filtering through the economics blogosphere.
“Hard data” refers to concrete improvements in the economy, such as a firm hiring more people or an increase in average wages. Meanwhile, “soft data” refers more to Americans’ sentiments and beliefs about the direction of the economy.
Since US President Donald Trump’s election, a bunch of sentiment indicators have shot up: for example, small business owners are feeling optimistic and consumers now think the government is great for business.
But at the same time, we have not seen the hard data match the improving sentiment yet. Moreover, Trump’s pro-business tax cuts and deregulation agenda have not yet gone into effect, meaning that some of the benefits that firms are anticipating might not actually happen.
This is the crux of the debate around “hard data versus soft data:” Will these improving sentiment indicators actually translate to concrete improvements in the US business sector, or are they just a reflection of Americans’ (and, more specifically, Republicans’) hopes for the current US administration?
The short answer, of course, is that we won't know until after we see what the Trump administration actually pushes through. It will also take time for the effects of those policies to show up in the hard economic data. And so, at this point, it's more of a fascinating study in perception of the US economy versus the reality of the US economy.
The FOMC specifically touched on this "hard data versus soft data" issue, according to their minutes (emphasis ours):
"Participants generally agreed that the recent momentum in the business sector has been sustained over the inter-meeting period. Many reported that manufacturing activity in their Districts had strengthened further, and reports from the service sector were positive. Business optimism remained elevated in a number of Districts. A few participants reported increased capital expenditures by businesses in their Districts, but business contacts in several other Districts said they were waiting for more clarity about government policy initiatives before implementing capital expansion plans. Investment in oil drilling, and particularly extraction from shale, was described as increasing in a couple of Districts, and demand for related production inputs was also said to be expanding. Nonetheless, slower economic growth, ample existing capacity, and modest returns in the energy sector were noted as factors that were continuing to restrain overall capital spending."
In other words, optimism remains high in some Fed districts (soft data), but actual new business activity has been somewhat mixed (hard data).