Economic View: November 15th

Last week was difficult for the stock market, partly because of the normal tendency for Wall Street to sell off to take profits as the earnings season closes and upside surprises are less likely, but also because of Cisco’s cautious comments.  This week the big question will be numbers, and there are already interpretation issues emerging.

Retail sales climbed more than expected and inventories rose more than expected as well, and this suggests that the holiday season may be shaping up better than economists had forecast.  If that’s the case then we might well see continued reductions in unemployment; remember that last week employment rose as retail jobs were created.  But the NY manufacturing index fell rather sharply, which could mean that US manufacturing at least is still lagging inventory and retail processes.  Many consumer goods are now produced overseas, of course, so that’s very possible.

On the international front, the situation with sovereign debt in Europe is raising its head again, with Ireland said to be on the verge of needing a bail-out (some say discussions are already underway but Ireland insists it doesn’t need one) and Greece rebelling against austerity by electing more socialists.  A weak Euro would normally hurt the US export trade, but with the QE measures of the Fed it could also take some heat off the US by lowering the Euro as QE lowers the dollar.  It also makes the EU house look less orderly, making it harder for countries like Germany (who is leading the EU battle against shoring up other countries’ debt) to criticize.

The stock market worldwide is much less reliable as an indicator of the overall state of the global economy since retail investors have tended to flee the market in the face of the flash crash and volatility.  That means that things are whipsawed by hedge funds that are trading rather than investing; moving in and out on small trends and not reflecting larger economic-level ones.  That may also be a factor in understanding why previous the Greek debt crisis sunk stocks in the spring and the market is now reacting to the Irish debt problem with apparent unconcern.

I think the good news here is that the world economy is recovering.  The bad news is first that the recovery is still fragile and subject to reversal based on sectional policy differences, and that the root cause of the problem—asset bubbles—hasn’t been dealt with anywhere in the world, much less here where the last couple started.  That’s our bad, and one I hope doesn’t bite us again in a year or so.

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