Monday, April 21, 2008

What Do They Know That We Don’t?


The stock market is up but the economy is down. Why?

The customary explanation: The economy in general, and corporate earnings in particular, are set to rebound in the second half of this year because the good news - in the form of falling interest rates, tax rebates and surging exports – will more than offset the bad news – in the form of weak housing and rising gasoline prices.

Maybe so, but today’s Wall Street Journal, in an article by Kelly Evans, ( entitled “Firms ‘Notably Downbeat’ on Economy,” provides reason for doubt:

“U.S. companies, burdened by worries about slow sales and tighter credit, have turned pessimistic, a new survey shows…

“Companies in several industries, including manufacturing, telecommunications, finance, and retailing, reported falling profit margins and slumping demand for their products during the first three months of 2008, according to a quarterly survey by the National Association for Business Economics……

“The respondents largely concluded that recent government steps to help stimulate the economy would have no effect on their business.”

An April 11 Journal article by Phil Izzo with the title, “U.S. Economy hasn’t Hit Bottom, Survey Says,” ( reinforces that view:

“The weakening U.S. economy has further to fall, according to the majority of economists in the latest Wall Street Journal forecasting survey.

“By a 3-to-1 ratio, respondents said the economy is in a recession, and almost three-quarters said the economy hasn't yet hit bottom…..”

Economists have a bad record forecasting the business cycle’s turning points, and most were late calling the current recession. But, who knows, this time they may be right.

Finally, an April 12 article in The Economist with the headline “The long hangover” carried this subtitle: ”America’s economy is in recession. Don’t expect a quick recovery.”

A key paragraph informed us:

“In its latest World Economic Outlook, published on April 9th, the IMF slashed its forecasts for America's economy both this year and next. It now expects GDP to shrink in every quarter of this year. By the fourth quarter the economy will be 0.7% smaller than a year before. (Only three months ago the fund expected a rise of 0.9%.) Nor does the IMF expect 2009 to be much better: GDP will grow, but at well below its trend rate.”

So much for the experts. What do ordinary folks think? The chart below measures the Conference Board’s survey of consumers’ confidence in the economy. You can see the last entry in the chart was about 90. Now update it with the most recent reading: 64.5 in March.

Consumer Confidence

(Click on chart to enlarge)

Recessions shaded

That’s just about where the economy was at the bottom of the last downturn when our invasion of Iraq began. If it slips below 60, we’re in real bad news.

Makes you kind of wonder what the stock-market optimists know that no one else knows.

(The chart was taken from [Click on Seminars and then Charts.] Go there for additional charts on the economy and a list of Economic Indicators.)

© 2008 Michael B. Lehmann

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