Business-sentiment surveys: be careful with the findings

FINANCIAL markets treat surveys of business sentiment with considerable reverence. The headline measures are among the most widely forecast economic releases. If investors are prepared to go so far as to pay economists to forecast data, that tells us that the data is considered important in the financial markets.

Current sentiment surveys reveal very high levels of confidence, signalling stronger economic activity than is reported in reality. I believe these sentiment indicators are exaggerated, and will narrow the gap with real-world data.

There are five reasons such surveys may be flawed indicators: