Few would argue that markets are almost entirely apathetic to even the worst and most negative of headlines in this post-crisis world. As we noted earlier, it seems we are 'shell-shocked' at a 'recovery' that UBS describes as 'not exactly an uplifting experience' – global growth went straight from 'collapse' to 'mid cycle' without ever enjoying the healing properties normally associated with a one to two year recovery process. For economists, one interesting question is whether this 'new normal' is unduly influencing economic sentiment. We would somewhat expect traders/managers to be behaving in an increasingly agitated manner; jumping at sudden noises, overreacting to shifts in economic data and generally exhibiting signs of stress, economic hysteria, and volatility. In reality, both consumers and businesses have become quite blasé about the economy. Sentiment is actually a lot less volatile than the economic circumstances would normally suggest it should be, and so (via UBS) we present 'The Indifference Indicator' to track just how 'subdued' regions have become.
Via UBS' Paul Donovan: The barometer of blasé
To test whether consumers and businesses are more inclined to overreact to economic events we have compiled a blasé barometer. This is a relatively simple process. We take the three year standard deviation of a sentiment index, and we compare it to the three year standard deviation of a pertinent economic variable. For example, we could compare the volatility of US consumer sentiment with the volatility of real consumer spending growth. (We use consumer spending growth to match the dynamic nature of the sentiment index).
If sentiment volatility is rising relative to the volatility of the underlying variable that would indicate that the consumer (or business) is tending to overreact to changes in the economy. If the volatility of sentiment is declining relative to the volatility of economic data, that indicates that the consumer is becoming immune to tales of economic disaster – or at least is not prone to overreact. This does not tell us anything about the level of confidence, or whether confidence is helpful in predicting the underlying economic data – what is surveyed here is merely whether there is an overreaction or calmness on the part of economic agents at this stage of the cycle.
The following charts detail some of the results that we have compiled. For the most part there is little inclination to overreact. Consumers and businesses tended to panic in response the crisis, or at least reacted in a far more volatile manner than the underlying data would normally dictate. Now, however, there is an inclination to be far calmer. Indeed for many of the manufacturing surveys, sentiment is the calmest it has historically been in the face of economic trends, with the indices at or near all time lows. The exception is the German consumer, who seems to be inclined to react more strongly to economic data swings than is the case elsewhere, and to react more strongly than has tended to be the case historically.
The German consumer is modeled using a general climate indicator. It may well be that the insecurities of the Euro zone, and the way in which these have been reported in the German media, have encouraged a more volatile attitude from consumers. Similarly the very recent increase in the tendency to overreact from US consumers and manufacturers alike may reflect the intensity of media reporting on economic issues in the run up to the presidential election, rather than the economic reality of cyclical data.
It would seem that by the magic of central-planning we have indeed become much less agitated by the day-to-day dismal reality that lies just beneath the surface should you choose to swallow the red pill... or maybe, just maybe, the fiscal cliff is the awakening.