The hard and soft data tell a very different story about where the US is headed

The state of the US economy from a growth and inflation perspective is still the most important influence on the world economy and on global financial markets. So, understanding where the US economy is heading remains paramount.

The hard data, i.e. factual data, based on transactions etc., is currently pretty encouraging, in that the US growth data is resilient and the inflation data is falling. However, the hard data, by definition, comes with a delay, often quite a large delay, so soft data is worth trying to understand as it often acts as a leading indicator. Importantly, the soft data, at both a growth and inflation level, currently show a very different outlook to the hard data.

Starting with growth data, the chart below shows US retail spending is strong and actually in an upward trend. However, two closely followed consumer confidence surveys, which have been a good indicator of consumer health historically, have weakened materially over recent months to multi year lows. Remember, the US consumer accounts for about two-thirds of the US economy.

US retail sales resilient but consumer confidence surveys have weakened materially

Source: Bloomberg Finance – 09/05/2015 – 08/05/2025

Turning to inflation, the graph below shows that US CPI is falling, at the same time as inflation expectations are rising, again, to multi year highs.

Actual US CPI is falling but inflation expectation survey are at multi year highs

Source: Bloomberg Finance  01/04/1995 – 06/05/2025

In the past there have of course been divergences between the soft and the hard but the current divergence is quite significant. History shows that eventually the two converge but, crucially, it’s not always hard or soft that proves to be right.

Part of the difference will be that the soft data is more timely and so will sometimes act as a lead indicator but some of it will be that there is a difference between what people think and say, ie the soft data, and what they actually do, the hard data. As a result, sometimes the soft data will give false signals. For example, one thing is worrying about something but it can be quite another actually changing behaviour.

Importantly though, from an asset allocation standpoint, the hard data is suggesting a “goldilocks” scenario, while the soft data is suggesting that stagflation risks are rising. These two scenarios have very different implications for financial markets.

So, how can we interpret this data? Firstly, it’s important to note that hard and soft data often complement each other and, indeed, markets can be driven by both hard data and softer narrative. Secondly, the current environment is quite unique, specifically the policy uncertainty in the US. Thirdly, the all-important Fed has noted the divergence and is prioritising the hard data but not dismissing the soft data. Fourthly, the US is so politically polarised that surveys are somewhat distorted, and this comes through when respondents provide political allegiance along with their answers. Fifthly, the corporate earnings season has given little insight, other than many companies removing or broadening their guidance due to policy uncertainty.

Taking all that together, the broad data environment is struggling to reflect the current environment and particularly US policy uncertainty and the degree to which tariffs are absorbable at a consumer and business level. On balance, we would argue that the hard data is probably not as resilient as it seems, as some growth has been front loaded in an attempt to get ahead of any tariffs and therefore this distortion will unwind at some point. However, the high frequency hard data is also proving resilient, so there is no sign of that unwind just yet.

Our base case continues to be for a higher for longer interest rate scenario and we continue to believe that stagflationary risks have increased. As a result, we are short duration bonds, we maintain a material position in gold and have a bias away from US equities.

Anthony Rayner

Premier Miton Macro Thematic Multi Asset Team