What is a ‘Mustard Seed’
A mustard seed refers to an economic event that could eventually trigger economic recovery. Such events generally seem small or insignificant but could either signal or lead to broader economic growth following a recession or a bear market.
BREAKING DOWN ‘Mustard Seed’
Mustard seeds rank among the smallest seeds in agriculture but produce large trees, sometimes under adverse conditions. Historically, this has made the mustard seed ripe for metaphorical reference, including several instances in the Bible which refer to tiny seeds commonly interpreted as representing the growth of Christianity throughout the world. Larry Kudlow, formerly of CNBC and currently Director of the National Economic Council, popularized the term in the context of financial markets via opinion editorial pieces analyzing the U.S. economy’s recovery from the 2008 financial crisis.
Mustard Seeds and Green Shoots
In effect, mustard seeds describe the same phenomenon as the term green shoots, popularized by former Chancellor of the Exchequer of the United Kingdom Gordon Lamont during an economic recession in 1991. During a recession or bear market, many investors look for signs of a turnaround. When those signs can be difficult to see, investors frequently take the next logical step and look for small signs that could eventually bloom into stronger indicators of recovery. As with their agricultural counterparts, not all mustard seeds take root and not all green shoots produce full-grown produce.
For example, small changes to indices that chart consumer confidence or consumer spending, such as the Consumer Confidence Index could herald a turnaround if they represent the beginnings of a shift in spending patterns that could drive the economy toward recovery. Other signs of a distant recovery might include a rise in bank lending activity, which could indicate growth in the small business sector, in turn heralding a rise in employment activity somewhere down the road. Other business indicators, such as those included in the Purchasing Managers’ Index could provide hints that the economy has begun to stabilize or turn back toward growth.
Difficulties of Economic Predictions
U.S. Federal Reserve Chairman Ben Bernanke famously described what he considered to be green shoots in the U.S. economy in 2009. Instead of a quick recovery to robust growth, however, the indicators Bernanke saw led to a much slower and more protracted period of recovery. For better or worse, mustard seeds and green shoots become much easier to identify in hindsight than in real time, when it can be almost impossible to determine whether a hopeful sign will actually bear fruit.