The Week's Good News: Too Good to Believe?
Investors, traders and regular folk saw a raft of good economic news come out over the past several days. This was not your not-as-bad-as-expected bad news, which we've become used to -- indeed, hoped for -- over the past several months. No, this was authentic good news, at least on the face of it.
Should you trust it?
-- A week ago Friday, we learned that consumer confidence in early September rose more than expected.
-- On Monday, President Obama said in an interview that he has a "strong inclination" against asking Congress for a second stimulus, which is good news for America's soaring national debt and deficit.
-- On Tuesday, we found out that August retail sales jumped more than expected.
-- On Thursday, we learned that new jobless claims from the week before actually dropped, which was not expected. Also on Thursday came this whopper: For the first time in two years, American household wealth actually went up for a financial quarter, in the period from April to June.
We also know that Thursday was the first down day for the Dow Jones, the S&P 500 and the Nasdaq, which enjoyed three straight winning days, Monday through Wednesday.
Even if you don't pay attention to the economy 24/7, a lot of this probably wafted into your brain over the last week. And the brain being what it is, it likes to make order of things. It receives individual pieces of seemingly related data and tries to string them together to make a story, a truth.
If you're among the more enthusiastic among us, the truth you may have come up with was, "Happy days are here again...!" Even the more sober of us may have thought, "Huh. Looks like things are turning around."
But the brain isn't so smart all the time. This kind of connect-the-dots thinking is what brought you moon landing conspiracy theories and inexplicably led to Kevin Costner being cast as Robin Hood.
So let's analyze the data, piece by piece, and see if it tells us the same story. To help, I e-mailed Shannon Zimmerman, analyst at Alexandria's Motley Fool, and asked him to review the good news of the past several days.
To start, Zimmerman pointed out that consumers may say they're more confident, but the data show they're not raising their overall spending (more on that later). What they're doing -- what you're doing -- is paying down your credit card debt. As the U.S. economy is 70-percent based on consumer spending, until you start buying those flat-screen TVs again, the economy will remain flat, at best.
When it comes to a second stimulus, the president left himself some necessary wiggle room. One of FDR's many great mistakes in mis-managing the Great Depression was turning off the government spigot too soon.
"Opting for a second round of stimulus spending, in fact, may well end up being the tough, disciplined thing to do," Zimmerman wrote. Obama "should weigh the evidence and steer policy accordingly. It's not especially sexy. But it's smart."
The same thing popped out immediately to both Zimmerman and me on the August retail spending bump: Almost all of it came from the government-sponsored cash-for-clunkers subsidy. If you remove new vehicle sales and gasoline sales (for those new cars) from the August retail figure, it rose only .6 percent, essentially flat. So much for the big retail surge.
True, 12,000 fewer people filed jobless claims the week before last than in the previous week. But even with the surprise 12,000-person drop, an additional 545,000 new people filed for unemployment. That's well off the 700,000 figures we were seeing in January, but it's still bad.
And remember: The economy has to add something like 120,000 new jobs just to keep unemployment from rising. Finally, the official unemployment number is 9.7 percent and most economists -- and the White House -- expect it to crest above 10 percent. And don't expect it to start dropping as soon as it peaks.
Speaking on CNBC on Thursday afternoon, billionaire Eli Broad -- who founded a Fortune 500 home builder and a big bank -- said "we're not going back to four-to-five percent unemployment in the next several years, in my view."
Finally, that rise in household wealth? Well, that is almost entirely attributable to the 50 percent stock market rally over the past six months, as it's come off its early March bottom. You know this to be true every time you check your 401(k). That's real money back in your retirement savings, and that's good. But no one expects another 50 percent rally over the next six months.
I have been accused of taking every seemingly good piece of news and letting the air out of it. Just my sunny personality, I guess. So I'll leave you with words from Zimmerman, who makes his living as a stock analyst and describes himself as an optimist, albeit a pragmatic one.
He writes: "I think the mad money has been made and that it's going to pay to be selective when adding stocks to your portfolio. I notice, for example, that Warren Buffett has been buying stocks again. It's always smart to follow that guy's lead, which is typically into high-quality cash-rich companies with Grade A management teams and balance sheets. That's certainly where I'm shopping for bargains right now, and on a relative basis anyway, they're plentiful."
-- Frank Ahrens
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September 18, 2009; 10:23 AM ET
Categories: The Ticker | Tags: Motley Fool, Shannon Zimmerman, Warren Buffett, cash for clunkers, consumer confidence, jobless claims, retail sales
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