Dollars and Sense: Positive news fails to impress Wall Street

Market doldrums. The markets drifted this week, trading in a fairly narrow range. Part of that drift was due to the U.S. markets closing last Monday for Labor Day. The big news this week was government action. Two surveys showed China’s manufacturing growth slowed in August. The surveys should have driven markets downward, but most traders think the Chinese government will stimulate growth. That caused Asian stock markets to rise last Monday. On Thursday, stocks rose in the morning after the European Central Bank (ECB) announced several steps to stimulate the struggling eurozone economy. It cut a key short-term interest rate and said it plans to start buying asset-backed bonds.

Not so impressed anymore. Though stocks were up Thursday morning, by the end of the day they finished lower. What happened? In part, investors had less confidence in the ECB—or any other central bank—to look into the future and do the right thing. In one sense, that was a good sign. The U.S. markets are trying to wean themselves off of the Federal Reserve’s quantitative easing program. The fact that investors didn’t get all goo-goo-eyed over ECB President Mario Draghi’s announcement suggests they might be realizing artificial government stimulus is just that: artificial. It’s no substitute for true economic health.

Mostly positive reports. Critics continue to say the U.S. recovery has been too slow because of government intervention. While slow, the growth has been steady. The Institute for Supply Management’s index of factory activity this week rose to its highest level in more than three years, and construction spending was also up. Another report said service-sector growth rose to a six-year high in August. It was the 55th straight month of growth in that sector. Auto sales numbers for August released last Wednesday showed Chrysler up 20 percent and posting its best August sales since 2002. Overall, however, the car market was just OK. Ford sales were flat, and GM dropped 1.2 percent. One of the reasons the markets drifted this week is that all this good news was mostly old news. The construction number, for example, was for July, and strong construction activity was already baked into to the markets.

Employment remains sluggish. The unemployment rate did tick down a tenth of a percentage point to 6.1 percent, but the new jobs number was much lower than expected. June and July numbers were revised downward, too. This news is not disastrous. The labor market is still growing, but this month’s numbers highlight how sluggish the economic recovery has been.

The week ahead. It will not be a big week for economic reports. The markets will likely marinate in the mediocre jobs report for several days more. The August retail sales report comes out Friday. Consumer spending is responsible for the vast majority of economic activity in this country, so both the markets and policy makers will keep a sharp eye on that report.