The latest interpretation of the usual economic indicators by the economic big wigs suggest conflicting trends in the health of the world’s economy. Fed Chair Ben Bernanke, in his May 5th testimony before the Joint Economic Committee, cryptically described the recent economic activity as a series of “fits and starts” and “green shoots,” providing little confidence in future growth and even less confidence in Bernanke’s understanding of the mercurial conditions pervading the economy. While optimism among economic pundits rose with last week’s 1.7 percent increase in the Dow Jones, and 1.3 percent increase in the Standard and Poor’s 500, most signs of sustainable growth continue to lag.
The Economist credits the stock market bursts to yet another false promise. According to the magazine, the newest increases represent the 5th time since the recession started that the economy has shown signs of life; in each case the apparent rally has failed to produce lasting strides toward recovery.
Indeed, the first quarter saw a 6.1 percent decline in Real GDP, the nation’s third largest automobile company declared bankruptcy, and data to be released Friday is expected to show another increase in the unemployment rate. Even the latest Dow Jones Economic Sentiment Indicator, which is designed to respond to fluctuations in consumer and investor confidence levels, remained stagnant despite the stock market gains.
While this apparent confusion and market instability should certainly make us cautious of proclaiming economic salvation any time soon, we should not, however, allow it to inspire rampant consumer or investor pessimism. Prices in commodity markets remain low and the government bailout plan will continue to inject financial capital into all corners of the economy. Additionally, credit spreads are narrowing, most credit indexes are showing a rebound, the S&P Homeowners Index is up, and the banks and Morgan Stanley Retail Index is on the rise.
Thus, while it would be foolish to begin celebrating the end of the recession in light of Bernanke’s less-than-comforting comments, and the recent history of ’starts and stops,’ we should not be surprised if the stock market steadily recovers with a streak of small growths, likely foreshadowing the eventual economic recovery.
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Have you ever heard of the concept called ‘the dead cat bounce’?
Yes. The height of the bounce depends upon the relative elasticity of the demand for hope.