Academic journal article ABA Banking Journal

The Case for a Continued Recovery. (the Economy)

Academic journal article ABA Banking Journal

The Case for a Continued Recovery. (the Economy)

Article excerpt

THE FUNDAMENTALS FOR A sustainable, low inflation recovery are in place, yet markets continue to resist any meaningful rally. The succession of "extra-market" shocks, from post-Y2K through 9/11 and the corporate scandals combined to stun equity markets for nearly two years. Now the prospect of armed conflict in the Middle East adds new uncertainty to an otherwise sound economy. The following summary of some of the fundamentals offers a basis for assessing the near-term prospects.

Investor sentiment improves. Market participants are divided on the importance of upcoming economic evidence. The Gallup Poll's Index of Investor Sentiment moved higher in late summer, driven by sentiment of "substantial" investors. This suggests that more savvy investors suspect that an emerging economic recovery will ratify a current buying opportunity.

Labor market is the risk. If there is a slowdown in the works, the labor market is the place to track it. A recent rise in claims for unemployment insurance undermines sustainability. However, layoff announcements are at their lowest since late 2000, less than one-fourth of their 2001 recession peak. The manpower survey is consistent with monthly non-farm jobs between 80,000 and 100,000. Surveys of temporary employment services have spiked upward in recent weeks.

Household fundamentals are sound. There just isn't any data-related reason to expect consumer spending to fail. Consumer confidence measures are poor predictors of actual spending. Feeling bad is not likely to overwhelm the stimulative effect of lower taxes, "0%" financing, house price appreciation, historically low mortgage rates, and availability of equity loans. …

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