Friday, October 06, 2006

The Dow hits a record, but the economy isn't booming

By Nancy Jane Moore

The stock market is on a roll: Last week the Dow-Jones average hit a record high. That's great for big-time investors, but it doesn't mean the overall economy has recovered. This breaking news headline from today's New York Times -- so new it doesn't even link to a story yet -- says it all:

U.S. Economy Adds 51,000 Jobs in September, Far Fewer Than Expected

And a Times story from October 3 adds more information:
The burden of housing costs in nearly every part of the country grew sharply from 2000 to 2005, according to new Census Bureau data being made public today. The numbers vividly illustrate the impact, often distributed unevenly, of the crushing combination of escalating real estate prices and largely stagnant incomes.

New jobs down, increased housing costs, stagnant incomes: that's the economy for most of us. A booming stock market may help those of us who have 401k plans -- assuming that value holds up until we retire -- but it doesn't do much for working folks right now.

As I wrote back in August:
The rich are getting richer, the workers are losing ground, and the poor remain stuck. 37 million people still live below the poverty line in the US -- that's about 12 percent of the population.

I've always looked at the stock market as legalized gambling -- the odds may be better than the lottery and it does appear that if you put your money in something safe and leave it there, you will have more when it comes time to retire, but essentially you're betting that the stock price will go up when you invest.

I don't look on the stock market as a good way to gauge the overall health of the economy. For example, when companies lay off thousands of workers or export jobs to other countries, their stock goes up. Those may be great decisions for the corporation, but they don't do a thing for all those people they put out of jobs.

And when wages start going up, someone always screams "inflation" and the market tanks.

Maybe what's good for General Motors isn't necessary good for the USA. Oh, wait a minute. GM appears to be crashing, too. We need an updated example.

What's good for Halliburton isn't necessary good for the USA.

7 comments:

El Borak said...

"That's great for big-time investors, but it doesn't mean the overall economy has recovered."

It's not particularly great for big-time investors, either, because market breadth is very poor and the all-time high is simply the same as the nominal high in 2000 before adjusting for the loss of buying power since then. If it's good for anyone, however, it's good for index fund investors.

The DJIA has about 40 stocks in it, and when people buy an index fund (the most popular type of mutual fund) that money gets invested in the stocks in the index, no matter what. The prices of index stocks are becoming less and less a function of the economy and more an more a function of how many people are choosing to invest how much of their 401(k) money in index funds. Supply/demand and all that.

So right now there is a real disconnect between what people perceive as "the market" (40 stocks that make up the DJIA) and the real, broader market, which is not doing nearly as well. Even your favourite stock (HAL) is 1/3 off its highs.

But there's an even greater disconnect between reality and the numbers coming out of government that people base their economic decisions on. For example, of the 51k jobs in the jobs report, 28k are the result of the CES Birth/Death statistical model. They are "statistics" in the worst possible connotation of that word, not jobs measured. Don't even get me started on GDP...

Nancy Jane Moore said...

Thanks for adding some real depth to the economics. I do recall hearing a recent report that the Dow-Jones average was not considered a particularly good measure of economic health -- that the S&P, which is not at an all time high, is a better indicator these days. I know they made some changes to the Dow, but I gather they weren't enough.
If you get a chance, could you explain the statistical issues related to the 51,000 job increase? I gather you don't think that figure is particularly accurate. If you could tell us whether it's high or low, and explain the CES Birth/Death model and why that makes it flawed, I'd appreciate it.
I'm under the impression that we need to create about 150,000 new jobs a month just to keep pace with population -- is that an accurate number?
I confess I didn't look to see how Halliburton stock was doing -- I was just contrasting who's doing well out of this war with GM, who did well out of WWII. (That's where "What's good for General Motors is good for the USA" comes from -- I actually think it originally wasn't used ironically.) Come to think of it, Brown & Root, which is now part of Halliburton, made a lot of money out of Vietnam.

El Borak said...

"I do recall hearing...that the S&P...is a better indicator these days."

The broader the average (IMO) the more accurately it represents the economy. The DJIA has 30 stocks (I was incorrect earlier), the S&P500 has ...wait for it... 500 ;) but it still suffers from the same problem.

Index funds that attempt to match a certain index *become* that index if you throw enough money at them, because they invest not only in just those companies, but they invest in the same proportion that those companies are measured in the index. The more money that pours into those funds, the higher the indexes go whether the companies prosper or no.

Other less popular indexes (e.g. Dow Transports) are doing less well, and I personally believe they are a better representation of how companies are "doing." That being said, most stocks are overvalued by historic measurements, because stocks are 'hot' and people buy them for that reason, not necessarily because companies are prospering. It's like measuring the wind with a wet finger: useful but limited.

As for the changes in the Dow being "not enough" it all depends upon what one expects the Dow to measure. Theoretically it's supposed to represent the 30 largest companies, but that means that when companies are not doing well (their market cap is falling) they tend to disappear from the average, replaced by rising companies. This lends an upward bias (imo) to the index.

For example, in 2004 AT&T (in the DJIA since the 20s) was dropped in favor of Verizon. One can make a lot of good arguments for the change, but the result is that a falling company was replaced by a rising one. That makes long-term measurements less useful, because they are not measuring the same thing. So 2006 vs. 2000 is less meaningful than most realize, but it's a great sales pitch for the shills on CNBC.

"I gather you don't think that figure is particularly accurate."

I simply don't know whether it is or not, but I don't trust it. As the BLS says:

"The most significant potential drawback to this or any model-based approach is that time series modeling assumes a predictable continuation of historical patterns and relationships and therefore is likely to have some difficulty producing reliable estimates at economic turning points or during periods when there are sudden changes in trend. BLS will continue researching alternative model-based techniques for the net birth/death component; it is likely to remain as the most problematic part of the estimation process."
http://www.bls.gov/web/cesbd.htm

So if we are entering a recession (as I believe we are) CES is liable to be innacurate. But no one knows for sure. I note that in the last 16 months, there have only been 3 downward adjustments (a total upward bias of 1.7m jobs) and in a number of months CES has accounted for 90+% of the jobs. A friend of mine remarked once that "we created 200k jobs this month, and only 250k of them were a result of statistical manipulation."

The potential for manipulation, like the potential for inflation and GDP manipulation, is tempting, because the more numbers rely on murky statistics rather than counts, the more subjective they become. There is no doubt that if we had not added CES, 100k jobs/month "disappear".

"I actually think it originally wasn't used ironically."

It was spoken by Charles E. Wilson, former GM Prez who became Eisenhower's SecDef in 1952. He was asked if he could make a decision that might hurt GM, and while he said he could, he could not imagine such a circumstance because "for years I thought what was good for the country was good for General Motors and vice versa."

As far as how many jobs we need to create, 150,000 is simply an agreed-upon estimate. As social trends change (more or fewer moms working, more or fewer people retiring) that can change, but I accept it as I have no better number. That being said, I don't know that's it meaningful in any given month. However, if it is the case, unemployment should rise in months where job creation lags. It doesn't always work that way. I'd call "shenanigans" but as I said, I have no better numbers.

Brown and Root, now part of Haliburton, started building navy ships in the 20s and has had a very cozy relationship with the feds since, especially with Texas-based politicians. There was a reason hippies called it "Burn and Loot" when a certian prior Texan was President.

Hope that helps.

Nancy Jane Moore said...

Thanks -- you've increased my understanding of the issues. I could see a disconnet between the stock market reports and other economic news -- particularly the data on stagnant incomes and growing housing costs -- but I wasn't sure why they were so different. And now I know more about index funds, which have always really confused me.

Anonymous said...

Nancy and El Borak:

Thanks for the economic analysis and discussion. You both put complex issues and terms in words that even a financial naïf like myself could understand. I really liked the comparison of the market to gambling. Loses in the market, just like with gambling, can be deducted from your “winnings.” I suppose that’s why they term it, “Playing the market.”
Your mention of Halliburton and it’s incestuous relationship with the Bush Administration (e.g. Dick Cheny and Joe Allbaugh). It was the prospect of just such an “un-holy alliance” of wealth and power which President Dwight D. Eisenhower spoke about in his January 17, 1961, farewell address to the American public (which has since come to be called, The Military-Industrial Complex Speech). After addressing the rise of, and the necessity of “the military-industrial complex,“ Eisenhower concluded his speech with this warning:
We must never let the weight of this combination endanger our liberties or democratic processes. We should take nothing for granted. Only an alert and knowledgeable citizenry can compel the proper meshing of the huge industrial and military machinery of defense with our peaceful methods and goals, so that security and liberty may prosper together.
It has been estimated that the total cost of the war in Iraq and Afghanistan has, to date, has cost America in blood and money:
- 23,416 US casualties (2,729 KIA); plus, at least, 100,000 Iraqi dead
- $378-billion already spent or allocated (much above the initial $50-million estimated by the Bush Administration; while Joseph Stiglitz (Nobel Prize in Economics, 2001) estimates that the total cost may reach $2-trillion.
In September 2006, Dr. Anita Dancs (PhD Economics), research director of the National Priorities Project wrote:
“In fact, that amount of money could have provided health care coverage for all uninsured children for as long as the Iraq War has lasted; provided four-year scholarships (tuition and fees) to a public university for all of this year’s graduating seniors; built half a million affordable housing units; fully-funded the amount the Coast Guard estimated is needed for port security; tripled the energy conservation budget in the U.S. Department of Energy; and still enough would be left over to reduce this year’s budget deficit by one-third.” -- Read Dr. Dancs’ complete article, “The Opportunity Cost of War,” in TOM PAINE ( http://www.tompaine.com/articles/2006/09/28/the_opportunity_cost_of_war.php )

Nancy, you sure put a “nail in the coffin” of the GOP’s claim to economic growth for America. I have to agree and I’ll do so with the following:
The GOP’S writing about progress, but not for me;
Stocks go high, but not for me.
With the GOP to lead the way, I've found more clouds of gray
Than any Russian play could guar - an - tee.
We were fools to fall and get this way;
Heigh-ho! Alas! And also lack-a-day!
I know I can’t dismiss the mem'ry of their lies,
I know the GOP’S not for me.
[To be sung to the tune of “But Not for Me”(1930) words & music by George and Ira Gershwin; and my sincere apologies to both gentlemen.]

El Borak said...

"I really liked the comparison of the market to gambling."

But (at the risk of being pedantic) it is and it isn't.

Let me first say that for those who are buying investment vehicles but don't understand what stocks, bonds, and mutual funds are - as is true with a disheartening number of investors - it's gambling in a sense because they are wagering money solely on the idea that the market will rise enough for them to retire on. It's gambling because they do not understand what they are doing. For all they know, they are betting on a fast horse.

But at the same time, it is not gambling unless all risk is gambling because they are usually buying something worth owning. They are, in fact, gambling less than they think.

When one invests in stocks, that gives them an ownership of the company and therefore makes them the owner of the profits of that company. If the company does well, then they ought to do well. At least I hope they do, because I want them all to retire rich.

But it's difficult to understand people who complain that the economy is doing less well than it ought and who simultaneously object that corporate profits are obscene (not you that I've seen, but many on the left).

Those profits - in addition to funding new jobs - become the dividends and the capital gains that the little guys are unknowingly relying on to make their 401(k)s and pensions grow in value over time. Profits are, in fact, what makes saving for retirement by investing generally a winning gamble.

Anonymous said...

I should have clarified the “gambling” comparison: Long-Term Investors vs. Short-Term Investors. First, it should be stated that no one position is economically or morally correct. Long-term investors are looking for a solid investment. They want to purchase something of value. They want consistent growth and stability. The “loan” of their money to a corporation in exchange for stock warrants remuneration.

However, many in the market (stock or real estate) are looking for a “quick” turnover. Day-traders are similar to people who “flip” houses. They don’t care about the entity or people involved. They don’t care if a company flourishes -- that the economy and economic viability of the Nation grows. Their only concern is their personal bank account.

Thus, the ring-leaders of many of these “get rich quick” schemes dupe the little guys looking to make some money (Yes, each individual is responsible for their own choices. Caveat Emptor. But who should bear the onus when investment decisions are based on out-right lies: the person who lied, or the person who believed the lie?). Often, those telling the lies are taking illegal short cuts and are deflecting opposition with some form of bribery.

In their pursuit of big bucks, they’ll sell-out the very company in which they convinced others to invest; thereby, contributing to economic instability (e.g. Enron; the 1980’s savings and loan crisis; and most recently and egregiously the dynamic-duo of Jack Abramoff and Tom Delay). People lost their jobs and their savings in the trail of economic carnage left by these individuals. I’ve always called these crooks The Yuppie version of a drug dealer.