What Do You See?

Bloomberg has an article discussing the prospects for the economy going forward. One pessimistic pundit cited this survey of small business sentiment:

At first glance, the recent drop looks worrisome.  But then I looked at the entire graph.  What do you notice?  There seems to be almost no relationship between small business sentiment and the state of the economy.  The two really big recessions (1981-82 and 2008-09) are hardly even noticeable.  I can’t ever recall seeing a worse forecasting tool.

There are four odd surges in positive sentiment: late 1980, early 1991, late 2000 and late 2016.  Why would small business people suddenly become optimistic about the economy?  After all, the economy got worse in 1981 and 1982, and 1991 was a very mediocre year.  It also got worse in 2001.  It did get better in 2017, but nothing out of the ordinary.  So why those four surges in positive sentiment?  (Hint, what was going on politically at those 4 points in time?)

To be sure, there are some very good reasons to be concerned about the future prospects of the economy, including high inflation, an inverted yield curve and falling stock prices.  I’m certainly worried.  But don’t be swayed by pundits displaying graphs and telling you what it all means.  Don’t be like a child hypnotized by a shiny object swaying in front of their eyes.  Don’t become a victim of conformation bias.  Look closely at the entire graph—does it make sense?


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