Dollars and Sense: Government manipulation and market distortion

Government manipulation. It has been a strange couple of weeks, even months, in the stock market. The U.S. economy keeps growing, but it’s slow and not getting any faster. But the stock markets are hanging around at near record highs. The reason for this disconnect is government manipulation of the markets. We got a great example on Wednesday, when European Central Bank head Mario Draghi said the ECB’s trillion-euro stimulus program was working to help the eurozone economy. The fact that the European economy is getting better should have been good news, but it sent the markets down.

Bad news is good news. The markets have been badly distorted by government manipulation both here and abroad. Take China: The China Federation of Logistics and Purchasing’s manufacturing index showed activity stagnating. HSBC’s manufacturing index showed manufacturing contracted for a third straight month. That has added pressure on Beijing to roll out more measures to keep growth going there, and that sent Asian markets up.

Advice from the IMF. One final example from last week of how weird things are: Christine LeGarde, of the International Monetary Fund, cut its growth forecast for the U.S. economy and presumed to offer advice to the Fed, saying it shouldn’t raise interest rates until 2016. The Fed doesn’t take guidance from the IMF. Still, analysts saw LeGarde’s comment as a sign of fear over what will happen when the rates do finally start going up again.

Slow growth. She’s right about at least one thing, though. As I mentioned earlier, the U.S. economy is not growing very fast, and growth and productivity seem to be slowing. We got a report last week that nonfarm productivity fell at a 3.1 percent annual rate in the first quarter. The Institute for Supply Management, a trade group of purchasing managers, said its manufacturing index was 52.8 last month. Any number above 50 represents growth, but 52.8 is really slow growth and the first increase months. The Commerce Department released a revised first quarter Gross domestic product number last week, and we learned the economy actually shrank by a 0.7 percent annual rate. The shrinkage was weather-related. Still, the number was worse than expected.

Greek drama continues. We keep talking about a deal in Greece and the deal keeps getting delayed. The beleagured country was supposed to make a debt payment on Friday. As that date approached, and it became increasingly obvious Greece didn’t have the cash, the markets became more and more nervous. Finally, late last week, we heard Greece would exercise an option in its debt plan and roll all its debt into a single package. That averted the current crisis, but Greece just delayed the inevitable reckoning. When that day of reckoning comes, it will require a bigger payment. It’s hard to understand how Greece is going to be able to pay 1.6 billion euros at the end of the month when it can’t pay a fraction of that—just over 300-million Euros—now.

Unemployment. The big news for the week was the unemployment number. The U.S. economy added 280,000 jobs in May, the Labor Department said Friday. That number significantly beat expectations. The unemployment rate ticked up to 5.5 percent from 5.4 percent as more people entered the work force. All in all that was not a bad report, but it sent the markets down. Once again, another example of good news being bad news because of how the Fed might interpret the data.

The week ahead. It’s a fairly light week for government reports, but we will get the retail sales report on Thursday. It’s always a solid gauge of what’s happening in the economy, since retail sales and everything that gets us to the cash register—transportation, logistic, and manufacturing of consumer goods—accounts for up to 70 percent of the overall economy. After the unemployment report, it’s one of a half-dozen reports that I pay close attention to each month.

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