Goldilocks vs. the three bears
Despite the panic, some experts still think the U.S. economy
remains healthy and the crisis is overblown.
By Andrew Marks
Economists have dubbed it the Goldilocks economy: not too hot and
not too cold, everything is just right. And for the last two
years, those conditions -- combined with the extraordinary inflows
of cash from mutual fund investors and foreign institutions --
have pressed the market through its incredible bull run.
Now the three bears -- Russia, Asia and declining earnings --
threaten to jolt Goldilocks out of her complacent sleep. At least
that's one very reasonable interpretation of events in the U.S.
and worldwide markets this week.
Indeed, until this latest downturn, every fear about events abroad
or at home was tossed aside by yet another sign of U.S. economic
strength. Economists and market analysts alike looked on in awe as
the economy created jobs and pushed up wages even as inflation
remained at remarkably low levels not seen for 30 years.
But with stocks trading in ever lower territory (the Dow
industrials fell another 114 points, or 1.4%, on Friday; the
Nasdaq shed 46 points, or 2.8%), traders and analysts are suddenly
taking little comfort in the extended fairy tale. In fact, many
are forecasting its imminent demise, contending that the economic
crises sweeping Asia and most of the world's emerging markets will
soon drag the U.S. into a recession.
Still, there are those -- like CS First Boston chief economist
Rosanne Cahn -- who suggest that the underlying conditions remain
stronger than the selloff would suggest. Pointing to the latest
government economic data, Cahn said that "steady growth, high
employment, increasing wages and low inflation continue their
happy relationship."
"Many pros are in a panic induced by what's happening in the rest
of the world and our stock market," she said. "The economy remains
in terrific shape and should not be part of this equation of fear
that everyone is propounding. There is little reason to fear that
the recessions in Asia and elsewhere will do more than slow
economic growth in the U.S."
While Cahn may be one of the economy's most vigorous defenders,
she is far from alone in her views. Robert Goodman, senior
economic adviser at Putnam Investments, said in an interview on
Wednesday that "the fundamentals in the United States have not
been better in 50 years. What we're getting now is typical at this
stage of a business cycle. It's a market correction that's being
exacerbated by a lot of short-term concerns."
And John Lonski, senior economist at Moody's Investors Services,
suggested that "people are overpricing the bad news and
undervaluing the fundamentals of the economy." Here, point by
point, are the positive signs the true believers see in the
economy.
* Economic growth: The Commerce Department reported Thursday that
gross domestic product -- the prime measure of economic growth --
grew at an revised annual rate of 1.6% in the second quarter.
That's up from the earlier estimate of 1.4%, and down
significantly down from the 5.5% annual rate of the first quarter.
It's the weakest performance since the 0.4% rate in the second
quarter of 1995, but many suggest that the General Motors strike
shaved a full percentage point off the figure.
* Consumer spending: Responsible for 2/3 of the nation's growth
rate, consumer spending is considered the key to continued growth.
The government reported Friday that consumer spending slipped 0.2%
in July. Cahn said the July figure was skewed by a 5.3% decline in
spending on durable goods, including cars, which experienced slack
sales due to the GM strike.
Meanwhile, spending for nondurables rose 0.4%. "Consumer sentiment
is holding up well, according to the latest reports. Housing
starts and new home sales continue to grow. The consumer remains a
healthy part of the economic equation," Cahn said.
* Wages and employment: The government reported Friday that
personal income rose by a faster-than-expected 0.5% in July, and
said Thursday that the number of Americans filing first-time
claims for unemployment benefits fell 6,000 last week to a
remarkably low 297,000.
"Employment growth is slowing, but it's still growing in the face
of fears that lower corporate earnings would lead to layoffs. It's
just not happening," Cahn noted.
* The stock market: Consumer spending has been spurred in no small
part by the remarkable returns of the last few years. While many
fear that the market's plunge will depress spendthrift ways,
Lonski suggested that the Dow would have to fall another 10%
before it significantly slowed consumer spending.
"American consumers only just began spending the dividends of the
'wealth effect' " of the extended market gains last year, he said.
"I think it will take more than what's happened in the last few
weeks to turn off that spigot." |
