During the fourth quarter of 2012, stocks soared towards five-year highs, with the Dow approaching an all-time peak. In the same quarter, the Commerce Department reports that the U.S. economy had its first contraction since the recession.
How is this possible?
Despite the media’s insistence to the contrary, the stock market is not the most reliable economic indicator, a fact that has never been more evident than today.
Stock prices continue to increase for a couple of reasons. For the most part, a large percentage of companies are bringing in solid revenues and perceive decent growth opportunities, hence investors and analysts consider the market to have a relatively positive outlook. But, what most people don’t see is that they are still hoarding cash (investment in growth and jobs) like a prepper hoarding freeze dried meats.
Stocks are “clearly not reflecting the economy,” opined Rick Santelli of CNBC, an outspoken financial reporter oft considered a hero to many fiscally conservative Americans.
Second, there is and always will be a psychological component that contributes to the movement of the stock market. Many consider the study of the movement of the markets more suitable to a professor of psychology than an economist (look out Warren Buffett, here comes…Dr. Phil?). Right now investors are trading on an upward momentum. As the founders of PIMCO recently stated in an interview with Time magazine, “we are riding a wave, our only decision now is to time when to get out of that wave before it crashes.”
Yet, despite the market uptrend, the economy seems to be showing signs of a downtrend.
The 2012 fourth quarter economic contraction is only the latest in a string of news that would make even Bob Ross paint a sad face. The Consumer Confidence Survey recently reported a substantial fall in confidence, falling nearly six points further than expected, from 67 in December to nearly 59 in January. Some claim the lack of confidence has resulted from a smaller paycheck due to payroll tax increases that took effect January 1st.
Despite the common misconception that tax increases would only affect the “wealthy,” social security taxes went up by 50% for most income earners. The drop in income is likely to cause a tightening in spending for the first quarter 2013, which may substantiate negative to slow economic growth predictions.
The dollar also reached an all-time low against the euro, while increases in our nation’s debt is causing credit rating agencies to once again consider dropping our credit rating, despite all of Congress’ “quick fixes.”
News today of a massive 10% rise in unemployment claims—part of which may be explained by people looking for work again after previously giving up on their searches—brought greater concern about future employment. Because companies do not want to spend and hire, many think the current unemployment rate is the new norm. Hiring has averaged a paltry 150,000 jobs per month over the last two years, and economists predict that hiring may even slow this quarter, further dampening the employment outlook.
Democrats are, of course, quick to spin the poor economic news as a positive. “The drag from defense spending and inventories is a one-off. The rest of the report is all encouraging,” chief U.S. economist for Capital Economics, Paul Ashworth, claimed.
Your “one-off” just put our economy into negative territory. Sorry, but I don’t feel better.
Others blame negative growth on the effects of Hurricane Sandy, as well as on reduced spending. Sandy’s wrath certainly had negative ramifications, however, given that the total damage from the hurricane will total about .3% of GDP, the greatest economy in the world wouldn’t have flinched under normal circumstances.
The government’s ability to spend, however, is directly tied to how much it removes from the economy in the first place. If our economic downtrend is so strongly correlated to government spending, perhaps our reliance upon it as an economic driver could be the problem in the first place.
So, how do we solve the problem?
Don’t doubt the spin-doctors’ ability to pitch their parties’ platform as the panacea. What we don’t need is more spending and intervention. The side effects from our nation’s addiction to spending are becoming more and more evident. What we really need are solid growth policies that work in the long-term, policies that provide certainty and freedom so that companies, investors, and consumers feel confident that the economy will steadily grow.
But we’ll need gutsy legislators to standby and let policies work, resisting the temptation for knee-jerk reactions that start off as short-term Band-Aids, but end up being long-term hospital beds.
Justin Vélez-Hagan is the National Executive Director of The National Puerto Rican Chamber of Commerce and an Adjunct Instructor of Economics at the University of Maryland-University College. He is also the Sr. Contributing Writer for Politic365 and can be reached at Justin@Politic365.com or @JVelezHagan.