Calm before the storm. We almost got out of this week with no drama. The U.S. stock markets spent most of the week at or near record levels. Cyprus seems to have at least temporarily resolved its crisis, and Japan, which has been in economic stagnation for 20 years, rolled out a bold new economic plan to a good response. Here at home, a report showed construction spending rose more than expected in February, gaining 1.2 percent, compared with forecasts of a 1 percent rise.
Ominous clouds. Sure, some signs indicated not all was well. The Institute for Supply Management's March manufacturing index was 51.3. Any reading above 50 indicates growth. But it’s significantly lower than February’s number. Payroll firm ADP said early in the week that its monthly report was coming in worse than expected. On Thursday, the Labor Department said new claims for unemployment benefits rose to a four-month high of 385,000.
The storm hits. Then, today, the U.S. Labor Department issued March unemployment numbers. At first glance, they didn’t look disastrous. The unemployment rate actually dropped to 7.6 percent. But a closer look revealed what one blogger called a “hideous” jobs report. Jim Paulsen, chief investment strategist at Wells Capital Management, is normally an optimist, but he said, “I'm not going to paint it over, it's a disappointing report and it's going to have an impact on the financial markets." He was right about that. In the first hour after the markets opened on Friday, the Dow dropped 140 points.
Is the bubble bursting? So is this the end of the stock market rally? Most analysts think not. I’ve quoted market bull Jeremy Seigel before. Last year, when the Dow was below 12,000 and the crisis in Europe was on everyone’s mind, he said the Dow would go to 15,000. It topped out at 14,600. Not quite 15,000, but not bad. He’s now saying it will go to 16,000 this year, maybe 17,000. Of course, he could be right, but for all the wrong reasons. As we’ve discussed here before, one of the reasons the Dow is up is because the dollar is devalued and the rest of the world is in even worse shape. We learned this week, for example, that European unemployment hit 12 percent last month. That’s the worst rate since the creation of a single eurozone economy. Data like this, plus the scary situation in Cyprus, makes the U.S. a safe haven for capital and that in-flow could continue to drive up the markets. But simply being “less bad” than everyone else is not a sustainable or coherent economic plan.
So what’s going to happen? Most analysts say the U.S. economy will trudge along at its current pace of around 2 to 3 percent GDP growth. And being “less bad” than everyone else will work for a while longer. As the old saying goes: “In the land of the blind, the one-eyed man is king.” The U.S. economy may be handicapped, but compared to the rest of the world, we’re a safe haven for capital and for entrepreneurs from other countries. And that’s because our capital markets and our country in general are still mostly free, which is to say, still mostly in private hands. So if we can stem this growth in the size of government, and its influence in just about every area of the economy, from healthcare to the capital markets, we should be OK. That could happen, at least getting out of the capital markets could happen. Atlanta Federal Reserve president Dennis Lockhart said this week the central bank may be able to trim its bond-buying plan before year-end if economic growth continues to pick up and employment further improves. Some analysts believe the bond buying program, called Quantitative Easing, is leading us toward hyper-inflation and is the biggest long-term threat to the economy. If what Lockhart is saying comes to pass and we can get the federal government out of this bond buying program without disrupting the markets, that would be a good thing for long-term prospects.