The Economy

Brian Wesbury, chief investment strategist with Claymore Advisors LLC, notices something of a disconnect on the economy:

During a quarter century of analyzing and forecasting the economy, I have never seen anything like this. No matter what happens, no matter what data are released, no matter which way markets move, a pall of pessimism hangs over the economy.

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It is amazing. Everything is negative. When bond yields rise, it is considered bad for the housing market and the consumer. But if bond yields fall and the yield curve narrows toward inversion, that is bad too, because an inverted yield curve could signal a recession.

If housing data weaken, as they did on Monday when existing home sales fell, well that is a sign of a bursting housing bubble. If housing data strengthen, as they did on Tuesday when new home sales rose, that is negative because the Fed may raise rates further. If foreigners buy our bonds, we are not saving for ourselves. If foreigners do not buy our bonds, interest rates could rise. If wages go up, inflation is coming. If wages go down, the economy is in trouble.

This onslaught of negative thinking is clearly having an impact. During the 2004 presidential campaign, when attacks on the economy were in full force, 36% of Americans thought we were in recession. One year later, even though unemployment has fallen from 5.5% to 5%, and real GDP has expanded by 3.7%, the number who think a recession is underway has climbed to 43%.

My guesses for why this is:

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1. Iraq. Negative opinion on this casts a pall over everything.

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2. The media. All you hear about are layoffs, China, the trade deficit, the budget deficit and the impact of hurricanes on the economy.

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3. Comparison of this economy to that of the late 1990s. In the late 1990s the unemployment rate was under 4.5%, the stock market was booming, people were getting ridiculous stock options and people were getting high starting pay straight out of college (not me!). Of course, that economic boom proved unsustainable which led to the collapse. Nevertheless I think people still consider it to be the gold standard to which the economy should be measured.

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I would rank the importance of these three factors in reverse order.

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Update: Another take on the economy here.