Volatility redux redux

The stock market soared today, with the S&P 500 hitting its highest levels in nearly 3 years.  Up 40% in the last 3 years, the market seems to be telling us a robust economy is underway.

Yet there is no evidence of this in the real economy — at all.  Unemployment went up slightly, and the number of people participating in the labor force continued to decline.  GDP is crawling along at less than 2% real increase per year.  Inflation is contained to the point where bond yields are near zero.  Corporate profits are doing well because companies have maintained sales while brutally squeezing their workforce to the bone, firing higher-paid workers, using lower-paid temps, and finding ways to do without workers through outsourcing and technical change.  But one has to wonder how long sales can be maintained with slowdowns in China and Brazil underway, Europe in a renewed recession, and US worker’s income flat.

Much of the cheer alleged to be behind the market rise today was because the economy added 160,000 jobs in July, rather more than expected.  But this one-month number could be pure fiction, the product of seasonal adjustments.  The Labor department revised down slightly the already dismal job numbers of June.  And in July the Labor department ADDS about 1.6 million jobs to the overall employment numbers as a seasonal correction to avoid employment being affected by the annual release of school teachers in July, when the school year ends.  But there were far fewer teachers working this year, after the last few years of public budget cuts, so it’s very likely that the plus 1.6 million seasonal correction is in excess.  If it is in excess by just 5%, the real number of jobs gained would be only 80,000, right in line with the dismal numbers of the past few months.

Trades profit from volatility, and follow the herd, so what we’ve seen the last few years — big swings up and down on the slightest of news — is to be expected.  Still, the long term rise in the market is telling a different story.  It says a major economic recovery is just around the corner.  That would be nice.  Even nicer would be to know where that recovery will come from.  Otherwise, there could be a huge correction coming that will throw the economy into a fit of renewed recession.

We are generally replaying the 1930s in our policies and results, so why not expect more of the same?

About jackgoldstone

Hazel Professor of Public Policy at George Mason University
This entry was posted in The Global Economy, U.S. Politics. Bookmark the permalink.

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