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An Economic Mixed Bag

As always, things are too complicated to warrant either taking to the bomb shelters or uncorking the champagne.

12:00 AM, May 15, 2010 • By IRWIN M. STELZER
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Two conflicting currents are sweeping through both Main Street and Wall Street. The first is nervous-making; the second is soothing. They are, respectively, a sense that things are beyond the ability of individuals or governments to control; and a sense that the economy is turning around, that the financial sector will not melt down, that the jobs market is recovering, and that even the housing market is returning to something like normal.

An Economic Mixed Bag

The feeling that things are spinning out of control is an amalgam of seemingly unrelated events. The stock market drops almost one thousand points in a matter of minutes, and no one can figure out why -- not congressional investigators, not the regulatory authorities, not the Wall Street houses and traders who are supposed to understand even the slightest upticks and downticks in share prices.

Then, there is Europe. If a small, almost inconsequential country like Greece can precipitate a broad sell-off in the bond markets, and bring interbank lending to a screeching halt, imagine what some financial problem in a large country might do. Just as a problem in the U.S. sub-prime market triggered a recession here and in Europe, so the failure of some tiny bank in, say, Germany, might have dire consequences around the world. If Lehman Brothers’s failure could bring down the banking system, who knows what small bank, insurance company, or brokerage house might collapse, and bring the financial system down with it.

Finally, America’s Grecian style fiscal situation seems insoluble. Voters won’t give up entitlements, and there is no coalition that will force them to do so. Indeed, in the teeth of mounting deficits, the administration and congress lavish new entitlements on the voters whose favour they pursue. Meanwhile, corporate taxes are already among the highest in the developed world, and not much can be wrung from Obama’s target group, families earning more than $250,000 per year. So, deficits as far ahead as the eye can see, and beyond even that. Out of control.

Ralph Waldo Emerson had it right: things are in saddle and ride mankind. Or so all-too-many people, many of them not easily rattled, tell me.

But some of those very same people acknowledge that the economy is indeed improving, in no small part because things are not out of control: the Federal Reserve Board has done a brilliant and innovative job to help the economy recover; President Obama’s stimulus package seems to be having a positive if costly effect, with just the delayed timing that White House economist Larry Summers predicted to me it would; consumers are exerting control over their finances and reducing their credit card debt; more and more workers are honing their skills in a variety of educational institutions.

All of this is adding up to what appears to be a sustained recovery. Last week’s report that 290,000 new jobs had been created in April was, of course, the most-watched indicator, and analysts now are talking of 500,000 new jobs being added this month. Profits of the companies in Standard & Poor’s Index of 500 companies are up over 50 percent in the first quarter compared with a year ago.   

Little wonder that CEOs are permitting themselves a smile. A survey of chief executives by the Business Council (representing large companies) and the Conference Board (a not-for-profit) found the index of business confidence at 66.6, up from 50 a year ago. A bit more than 70 percent of all CEOs expect that economy to expand at an annual rate of between 2.1 and 3 percent this year, up from 51 percent who held that view last year. And Goldman Sachs is forecasting the economy will grow in the 2.5 -3 percent range in 2011.

The steel, transport, construction, banking, and auto industries are among those reporting major improvements in activity. Surprisingly, John Paulson (no relation to former Treasury Secretary Hank Paulson), the hedge fund manager who earned billions betting on the housing collapse, expects house prices in California to jump some 20 percent this year (admittedly, from a low base), leading a national revival in the sector. Individual estate agents around the country tell me that their phones are ringing off the hook. Of course, they would say that, wouldn’t they? Still, at minimum, the collapse in house prices seems to have come to an end.

So who has got it right? The cheerful CEOs, the consumers who are opening their purses a bit, the estate agents who claim to be busier than usual, or those with a vague feeling that the next unstoppable disaster lurks around the corner? The answer is that both groups exaggerate. People who think there is nothing to do but sit and wait for the next blow to fall forget that Europe has for the moment forestalled a liquidity crisis, proving that even its slow-moving governing mechanism can take action, even if a bit too slowly. The anti-terror agencies are doing a better job of tracking down would-be terrorists before they can strike, and it is likely that “circuit breakers” will be installed on all exchanges to head off future precipitous 1000-point drops in the price of any share. Not much can be done about butterfly wings.

The economic optimists also have gone a bit overboard. We have yet to see how the economy will perform once the Fed implements its exit strategy, which seems already to be underway; the effect of the stimulus wears off; the dicey commercial property loans still on the banks’ books are written down or off; and the politicians are forced by the bond markets to get the deficit under control.

As always, things are too complicated to warrant either taking to the bomb shelters or uncorking the champagne.

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