Don't Put Too Much Stock in Economic Good News
As we officially enter the second half of 2009, some stock-taking is in order.
Has the economy hit bottom, and is the recovery about to begin?
Is it safe to get back into the stock market?
Is it time for businesses to stop cutting and start investing?
Can the government begin letting up on monetary and fiscal stimulus?
The right answer to all of these questions is probably "no."
Certainly the economy and the financial system are in much better shape than almost any of us would have predicted as the year began. At the same time, the midterm outlook is nowhere near as rosy as suggested by the consensus forecasts from Washington or the second-quarter rally on Wall Street.
Given the size of the credit bubble, the amount of overcapacity that was allowed to develop and the staggering amount of wealth that has been lost, it would be foolhardy to expect the recession to be so shallow or the recovery so robust.
Government policies, certainly, have helped to moderate the pace of the adjustment and prevented it from spinning out of control. But the process of de-leveraging balance sheets and getting spending in line with incomes is nowhere near complete. Until they are, unemployment will continue to rise, businesses will continue to fail, and the economy will alternate between growing slowly and not growing at all.
We got a hint of all of this yesterday when the government reported the loss of 467,000 more jobs, bringing the number of jobs down to where it was back in March 2000. Stock markets here and around the world fell sharply on the news. And with tax revenue evaporating, some of the biggest states are being forced to curtail basic services and pay their bills with IOUs.
That's not to say there aren't some positive signs.
Monthly job losses have slowed, households have cut back on their debt, and some businesses have been able to float new issues of stocks and bonds.