The opening words of Dickens’s classic A Tale of Two Cities might well be applied to today’s domestic economic condition. Depending on where one sits, today’s economy may indeed be the best of times or the worst of times.

For individuals, the current condition is just about as good as it gets. The unemployment rate is at a five-decade low, inflation is non-existent, and wages are edging higher. This favorable backdrop is reflected in surveys of consumer confidence. The May reading of consumer confidence from the Conference Board rose for the second straight month and sits, “near levels from last fall near an 18-year high.” That sentiment is echoed by the University of Michigan’s Consumer Sentiment Survey. It, too, rose in May and currently sits just below a two-decade high in March 2018. The U.S. consumer confidence survey from the Organization for Economic Co-Operation and Development (OECD) tells a similar story. It has climbed for three straight months through April and currently sits just below its recent high from March 2018.

These are favorable times for small business owners as well. The April survey of small business optimism from the National Federation of Independent Business (NFIB) also rose for the third straight month to a level just below its all-time high from last August. The NFIB described the current environment by saying, “the continued economic boom is thanks, in a major way, to strong growth in the small business half of the economy.”

Consumers and Small Businesses are Feeling Good; Bigger Companies Aren’t as Exuberant

But that ebullience is noticeably absent when looking at bigger businesses, especially those affected by the current trade turmoil. The Institute for Supply Management (ISM) survey of manufacturing purchasing managers declined to a three-year low in April. The ISM remarked in its press release that, “export orders contracted for the first time since February 2016. The Purchasing Managers’ Index (PMI) trade elements are in contraction territory. The PMI has been inching down since November 2018. The manufacturing sector is expanding, but at recent historic lows.” The same is true for the IHS Markit survey, which has been declining since last May, and currently sits at a three-year low. In contrast to its consumer survey, the OECD survey of U.S. business confidence has declined for eight straight months through April and currently sits at its long-term average that signifies the line between optimism and pessimism.

The Conference Board’s first quarter survey of CEO confidence, published in April, characterized CEOs as, “pessimistic about current conditions.” In its first quarter CEO Economic Outlook, the Business Roundtable noted some easing from the prior quarter, “potentially reflecting uncertainty about softening global growth, CEO plans remained historically strong.” But this survey was published back in March. It will be interesting to learn how sentiment may have evolved when these last two surveys are updated for the second quarter.

It is worth noting that some of the concern expressed by business leaders may be starting to appear at the consumer level. In its May consumer sentiment survey, the University of Michigan noted the following; “Although consumer sentiment remained at very favorable levels, confidence significantly eroded in the last two weeks of May. The late-month decline was due to unfavorable references to tariffs, spontaneously mentioned by 35 percent of all consumers in the last two weeks of May, up from 16 percent in the first half of May…”

Markets Have Declined Since Trade Tensions Ratcheted Higher on May 5

The latest round of trade tension ratcheted higher on May 5 with the president’s tweets directed at China and continued with his threat of tariffs on Mexican imports last Thursday. When these developments are captured as the various sentiment surveys are updated, they are likely to reflect some further deterioration. Certainly, the stock market is saying as much, with the S&P 500 having fallen by 6.6 percent since May 5. But even more pronounced has been the reaction in the bond market, where the yield on the two-year Treasury note has declined from 2.34 percent to 1.88 percent in early trading this week. The ten-year note yield has dropped from 2.53 to 2.11 percent during the same interim.

What up until now has been a tale of two economies may be about to merge into one, with a deteriorating sentiment outlook. The latest round of indicators begins this week on Monday, with the releases of both manufacturing PMI indices. Another strong jobs report on Friday may go a long way in lifting spirits in the near-term, but a trade war that drags on will certainly take its toll on just how optimistic both consumers and businesses view the future.

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