Two weeks ago, the S&P500 was stalling. Last week, it started to fade. Closing down 2.6%, the S&P seems to be running out of reasons to go higher. Despite the massive liquidity poured into the economy, equity investors are starting to look for some evidence that the green shoots are real. And they’re having a hard time finding it.
Less bad will not be good enough to justify current prices, much less higher ones from here. Stock investors will need to see first derivative data showing sales and profit growth. But it doesn’t seem to be happening. FedEx reported losses that were worse than expected, and GE flat out reported in Bloomberg that it does not see orders picking up for another 12 to 18 months.
Economic data were mostly negative. NY Empire Manufacturing shocked at analysts by coming in at -9.4 when -4.6 was expected. CPI and PPI, although relatively stable month-to-month, each fell the most since 1950, suggesting that inflation is currently not a problem. Initial claims pushed up to 608,000 and continuing claims, although not another record, hovered at 6.7 million. The Philly Fed came in better than expected.
Christina Romer, the chair of Barack Obama’s Council of Economic Advisers (and expert on the Great Depression), has been a major proponent of the green shoots theory. Together with Larry Summers, Austan Goolsbee, Tim Geithner, and even Ben Bernanke, she has doggedly asserted that the economy is on the mend in the second quarter of 2009.
After speaking to Congress, the press and anyone else who’d listen that glimmers of hope are emerging, the equity markets have responded with a strong bounce and the credit markets have eased, allowing many corporations to roll over their debts. And, partly in anticipation of an incipient recovery, U.S. Treasury’s have fallen in price–thereby commanding higher yields, as one would expect in a recovering economy.
So it’s interesting that in the current issue of The Economist, Ms. Romer writes a feature piece that essentially says–but on the other hand….
In this piece, she argues that because the recovery has not really taken root, we must not rush to remove fiscal stimulus. Naturally, if the recovery is taking hold, then we should prepare to remove stimulus, so as not to create too much demand and not to stress our sovereign debt levels through over borrowing.
But she can’t have it both ways. How can an economy be recovering and not recovering–at the same time? Economically, this doesn’t make sense. And most of the data suggests that the economy is not yet recovering; it’s only falling at a slower rate.
Politically, this make sense. Ms. Romer wants the public to believe things are getting better so that they resume investing (think stocks and houses) and spending (think plasma TV’s and vacations). But she doesn’t want the public to act on this another way–by removing the stimulus that is needed for recovery to truly take effect, sometime in the distant future.
To most folks, this is called lying. To politicians, this is called doing one’s job.
Clearly, Ms. Romer has a talent for politics.