Dollars and Sense: Positive economic signs can't erase long-term problems

GDP shrank. The big news last week was the announcement that the gross domestic product shrank at an annual rate of 2.9 percent in the first quarter. We got that news on Wednesday, and stocks promptly rose. That’s because it showed the central planners in Washington, although they often claim to have their hands on the levers of the economy, are often the last to know what’s really going on.

Not worrisome? That’s not to say a decline in GDP is nothing to worry about. It’s very worrisome. And this was a big decline. The first quarter of this year was the economy’s worst since 2009, the lowest point of The Great Recession. But that’s why the markets worried about it back in January. You may recall the Dow fell 1,200 points then, and it has only in the past few weeks climbed back up to level we saw at the first of the year. Since that first quarter decline, the economy has returned to a growth mode.

Different political narratives. One of the problems we have here is that both sides of the political aisle want us to believe a different narrative. Republicans want us to believe the economy, despite its recovery, is still on the brink of collapse and that Obamacare and the president’s mismanagement have prolonged the recession much more than it should have. The Democrats counter with the argument that the financial crisis and the housing crisis took place on President George W. Bush’s watch and the recovery has been so slow because Republicans messed up the economy in historic proportions. Republicans counter that counter argument by noting the push for so-called affordable housing, the real precipitating cause of the housing crisis, began way back in the Clinton administration.

What’s the truth? The truth is that economies as large as that of the United States—a $17 trillion annual economy—don’t turn on a dime. As I’ve said many times in this space, it’s very dangerous to look at a single short-term indicator and answer that question. Right now, though, I can say the short-term indicators look pretty good. The housing market is improving. A report out on Monday showed sales of single-family homes, condos, and co-ops are near pre-recession levels. Merger and acquisition action continues. GE’s $17 billion acquisition of key operations of the French company Alstom got past regulatory hurdles. Oracle announced Monday it would buy MICROS Systems, which makes software applications in the food and beverage, hotel and retail industries, for $5.3 billion. And the Conference Board’s Consumer Confidence Index reached its highest level in almost six and a half years.

The elephants in the room. All that sounds pretty good, but the elephants in the room are inflation and the national debt. We got indicators last week—in the firm of a rising consumer price index—that inflation might be creeping back up. And the national debt has moved past the $17.5 trillion mark, which is now larger than the gross domestic product. That’s why some economists are concerned that despite all the positive short-term indicators, the economy is headed for the rocks if it doesn’t change course.

The week ahead. The July 4 holiday likely will dampen market activity, and we won’t be getting as many economic reports. But we will get the unemployment report on Thursday, the day before the holiday, so that could have traders dialing into their accounts from home or the beach if that number brings us any unexpected news.