On Tuesday AIM released its February Business Confidence Index, which slipped to the negative side of its 100-point scale (49.0) - the same day that the Dow Jones Industrial Average reached an all-time high. Does this make sense? Actually, it does.
The Dow's new peak was achieved on mixed results among the component stocks. Only 18 of the 30 current components are up since October 9, 2007, the date of the previous high, while twelve were down. The balance would be worse – and no record would have been set – had not Bank of America, Chevron, Cisco and UnitedHealth replaced AIG, Altria, General Motors and Honeywell on the Index, and Travelers not succeeded its former owner Citigroup.
Retail components of the Dow led the runup (the DJIA has been steadily "de-industrialized" in recent decades) as the sector's long-foreseen shake-out strengthened some of its biggest companies. Consumer-oriented manufacturers (and Disney) also did well. Results were mixed at best for financial, technology and pharmaceuticals. Capital goods producers lagged, although Caterpillar gained on strong exports to emerging economies.
The Dow 30 is, of course, pretty much the definition of "small sample size," but consider how those (apparent) patterns apply to respondents to AIM's survey and to the Massachusetts economy.
- The Massachusetts economy is oriented towards capital goods and business services more than consumer-oriented industries. Our leading sectors tend to be those whose DJIA representatives have fared less well.
- Ours is predominantly a small-employer economy; and AIM's membership, while it includes some very large employers, follows that pattern. The ongoing economic recovery, such as it is, has been kindest to the largest firms, in some cases (as in retail) at the expense of smaller ones.
- In terms of global markets, our state's economy is much more dependent than most (second among the 50 states) on exports to Europe, which is in or on the verge of continent-wide recession.
- The DJIA includes companies involved in fields (health, defense) that will be affected by federal spending cuts (sequestration); but the private sector in Massachusetts is unusually exposed to the direct and indirect effects of the cuts because of their potential impact on several pillars of our economy.
- Engaged AIM members, those most likely to respond to our survey, are knowledgeable about state-level issues, which include pressing fiscal concerns and proposed tax increases.
So, quite apart from purely financial issues, there are good explanations for the divergence between DJAI and BCI results. We don't have to choose between them – though if we did, I might go with the moderate skepticism of Massachusetts employers.