Don’t let the title fool you, I don’t do this at any regular interval, but I thought this would be a good time to talk about the economy as a whole. That is because we’ve left 6 months behind where we thought we were on track for a stabilizing recovery. Now the picture looks less rosy, more like a morning glory in the late afternoon.
At the beginning of the year, I was confident the recession was over. We’d all been told unemployment would stay high, which it has; we’ll get to that more below. But beyond employment, which lags behind an economic recovery, most people were feeling pretty good about the future going into 2010. But now that we’re 6 months into it, views are changing, especially mine.
Consumer Confidence: Consumer confidence is a measure of how average Joes feel about the economy. Economists care about this number because if consumers are pessimistic, then they’ll spend less. Likewise, if consumers are optimistic, they’ll spend more. Despite dramatic improvements all through the month of spring in this score, we’re now right back to where we were at the beginning of the year. We feel better about jobs and income, but are planning on spending less, thus the balancing out.
Employment: If you look strictly at the unemployment rate, things really haven’t changed much. It’s still hanging out between 9% and 10%. But, that number changes based on people deciding to look for jobs. If people feel good about their prospects, look for jobs, and don’t find any, then they show up unemployed. But if they just give up the search all together, then they don’t. So we can having a falling unemployment rate but actually be in worse shape in real terms. Worse though, is the length of time we’ve been unemployed. The historical range is between 10 and 20 weeks. We just broke past 35 weeks – that’s the average amount of time an unemployed person is without work.
Stock Market: In the first 6 months of the year, the S&P 500 fell more than 7.5%. Much of that occurred in May. There are some good reasons for the sell-off but they aren’t really important here. Just know that if you think the market is undervalued, you’ll find good company with me.
Housing: The situation with housing is about as bad as it can be. Prices were just starting to tick up in most markets but that was thanks to an artificial floor on demand created by the homebuyer credit. Since then demand is down, mortgage applications are down, and I’d guess prices are about to fall. That credit will need to be extended if government wants to hold up house prices further. I’m on the fence about how I feel about this.
Federal Government Debt: The national debt continues to climb to the sky with no end in sight. There is a breaking point somewhere when investors will stop buying the debt we’re selling. No one knows exactly when that will happen. Despite this increasing burden on the next generations, interest rates are really low. This is because foreign investors have no place to put their money. In other words, we may be in crazy debt, but we look to be in better shape than other countries.
GDP: Since the 3rd quarter of last year, we’ve continued to grow the economy. But the rate at which the economy is growing is slowing. This is expected to continue and by the time we get into 2011, we could see negative growth again.
Conclusions: I’m worried that the economy is slowing down too fast and no one feels good enough about the future to make the investments that could actually get us there. We need more people working, but they need jobs, so businesses have to feel better about future growth. People in Washington would have you believe that some kind of magical bill will save us all. I’m more inclined to simply cross my fingers and hope for the best. The key figure to keep your eyes on going forward will be job growth, which comes out with each release of the unemployment rate.
My confidence is wavering, but I’m easily converted back to optimism, so long as the sign is bright enough.
 By The Weakonomist |
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I have a very different take.
There have been four economic crises in the United States from 1900 through today. There is one factor that all have in common. In each case, stock prices had gone to two times fair value a little before the onset of the economic crisis. There has never been a time when stock prices went to two times fair value and we did not have an economic crisis and there has never been a time when we had an economic crisis and stocks had not gone to two times fair value. The correlation is perfect.
What’s going on?
Consider the amount of overvaluation this time. Stocks were overvalued by $12 trillion in January 2000. Stock prices always return to fair value over time. So we knew (if we cared to) that we were going to see $12 trillion of wealth disappear from our consumer economy over the next 10 years or so. No economy is so strong that it can withstand a $12 trillion hit.
That sort of hit does not just set people back for six months or a year. When we lose $12 trillion of wealth, all investors are losing about one-half of their life savings. That causes panic. Panic causes stock prices to drop to one-half fair value. On each of the three earlier occasions, we have seen stock prices fall to one-half fair value. We have a long, long ways to fall if this time is going to be anything at all like what we have seen on all other occasions when stocks became insanely overvalued.
I will believe that the rebuilding process has begun when people are talking openly about the dangers of overvaluation everywhere on the internet. We cannot begin to solve problems until we work up the courage to talk about them frankly. We are not there today.
I’ll end on an encouraging note. We have done such damage to ourselves this time that I believe that we will be able to develop a model for understanding stock investing that will prevent stocks from ever again becoming insanely overvalued. If we make it to the other side, I believe that we are standing on the threshold of the greatest period of economic growth in our history. We need to work up some courage, get to work, keep our spirits up, and hang in there through some very tough stuff to get to some very wonderful stuff on the other side of the big black mountain.
Or so Rob Bennett believes, in any event.
Rob
Rob Bennett´s last blog ..Financial Samurai- “How Come I Continue to Not Understand What the Debate Is About”