TOPICS > Economy

For U.S. Markets, ‘One Step Forward, One Step Back’

July 22, 2010 at 12:00 AM EDT
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Wall Street had a strong showing on Thursday, but the positive news was tempered by other economic readings showing declining home sales and rising claims for unemployment benefits. Jim Lehrer speaks with Greg Ip of The Economist for more.
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JIM LEHRER: Good corporate earnings reports helped fuel today’s rally on Wall Street. Caterpillar, 3M, UPS, and AT&T all did better than expected. That helped push the Dow Jones industrial average up by 201 points to close at 10322. The Nasdaq rose 58 points to close near 2246.

Those broad-based gains more than made up for losses on Wednesday.

The stock market’s surge came as other parts of the economy were headed in the opposite direction. The economy’s leading indicators fell in June, the second decline in three months. At the same time, sales of existing homes slid more than 5 percent, and the inventory of vacant homes was the largest in a year.

On the jobs front, new claims for unemployment insurance were well above expectations last week.

Speaker of the House NANCY PELOSI: The motion is adopted.

JIM LEHRER: With that in mind, the House of Representatives today gave final approval to extending benefits for the long-term unemployed through the end of the year at a cost of $34 billion.

House Speaker Nancy Pelosi said it shouldn’t have taken so long.

REP. NANCY PELOSI: Imagine that today we’re finally taking up unemployment insurance. Republicans in the Senate have stood in the way of so many initiatives, including unemployment insurance, until now. Unemployment insurance is not only important because it’s part of our compact with the American worker. It’s important because it’s job-creating.

JIM LEHRER: But House Republican Leader John Boehner said it’s one more big-spending bill that’s dragging down the economy.

Minority Leader JOHN BOEHNER: For 18 months, we have had a government that believes that change is only possible by passing 2,000-page trillion-dollar monstrosities, one after another.

Americans are still asking the question: Where are the jobs? And all President Obama has to offer them is more stimulus spending, more debt, higher taxes, and more job-killing regulations.

JIM LEHRER: The chairman of the Federal Reserve, Ben Bernanke, weighed in as well. At a House hearing, he warned against major spending cuts or tax hikes, for now.

BEN BERNANKE, Federal Reserve chairman: In the short-term, I would believe that we ought to maintain a reasonable degree of fiscal support, stability — stimulus for the economy. There are many ways to do that.

JIM LEHRER: Bernanke said, if a new recession threatens, the Fed could take its own stimulus actions — buying government debt or trying to spark new lending to business.

We go through this now with Greg Ip, U.S. economics correspondent of “The Economist” magazine.

Greg, welcome.

Corporate earnings, they were higher than expected. What happened? Why?

GREG IP, U.S. economics editor, “The Economist”: Well, the story of the last few months is that corporations have actually been reporting earnings that are better than analysts have expected, but often the market has not taken that well, because when you dig down, you find that a lot of that improvement is because of cost-cutting.

We know that employment has been weak. And one reason why is that companies, when they meet their sales targets, are doing it by making their workers more productive, rather than hiring more. The other thing especially — this was true today with companies like Caterpillar and UPS — is that the strong sales that they’re seeing are not in the United States. They’re in places like China and India.

So, the bottom line is that the market is doing well, but that is not necessarily a great sign for the economy. Over the last month, even though we had a good day today, that only kind of like takes us back to where we were, you know, a few weeks ago. It’s basically one step forward, one step back.

The market overall is telling us that it a sluggish outlook for the U.S. economy.

JIM LEHRER: And so, when the market goes up like that, it’s always a mistake to read that as anything other than the fact that the market went up today; is that right?

GREG IP: That’s right, that the sellers had less convictions than the buyers today. You kind of have to watch the trends over time.

I mean, the encouraging thing here is that, after a very rough spring, when things in Europe were really alarming people and we were worried about going back into recession, is that there has been stability, not just in the stock market, but in the borrowing markets, the credit markets.

And so there isn’t a strong sign of going back to a recession. But we also don’t see the evidence that we are having a strong recovery either.

JIM LEHRER: Those three numbers, the leading economic indicators, they are not terribly positive, are they?

GREG IP: No.

And unemployment insurance claims came out today. They went up, again, a number that is very volatile from week to week, but essentially telling us over the last month or so that very little hiring going on out there.

JIM LEHRER: And housing, too — the housing figures were not terrific.

GREG IP: Yes. Now, surprisingly, housing numbers were bad, but not as bad as people had expected. What we saw there was that the government had basically artificially stimulated sales with the homebuyer tax credit, which expired a couple months ago. We knew this drop was coming.

JIM LEHRER: How do you read what Bernanke is saying? He said it today. He said the same thing yesterday to a different congressional committee.

GREG IP: The Federal Reserve has lowered their outlook for the economy this year, although they haven’t really lowered it for next year, but not by very much. And it’s a bit surprising, given how bad the economic data is.

They believe that the economy has essentially entered a self-sustaining phase and that, even though things are a little tough out there, the financial system is so much healthier than it was a year ago, that should carry us forward.

But there is another sort of subtext here, too, which is that, if the economy does get a lot worse, there’s not a lot the Fed can do. I mean, remember, they have already lowered short-term interest rates to almost zero. They could do a few more unorthodox things. They have already bought almost $2 trillion worth of bonds, of treasury bonds and mortgage bonds. They can buy more.

But the fact of the matter is, we’re in the unusual situation where the Federal Reserve, to whom we usually turn for help at times like this, doesn’t have a lot of resources.

JIM LEHRER: So, when he says, well, we might do a little something hear or there, it is very little, right?

GREG IP: Very, very little.

JIM LEHRER: And the stimulus, there’s not — in terms of the other branches of government, there’s very little talk about a new stimulus package. So, what we have is what we are going to get and it’s going to have to be natural growth; is that correct?

GREG IP: That’s basically it.

I mean, if you think back to February, the president had a budget that envisioned over $200 billion of new stimulus. And here we are, relieved that we got $34 billion in unemployment insurance benefits, which, by the way, is a fraction of the stimulus we will lose as the previous stimulus program expires, and as some of the Bush tax cuts, which expire at the end of this year, go up.

So, you’re in that kind of tricky situation of fiscal stimulus actually turning from a positive for the economy to being a bit of a negative, at a time when we don’t really have the Federal Reserve with a lot of ammunition to help out — some, to be sure, but not a lot.

The betting is that the economy does have this sort of natural organic growth to it and it can survive these challenges.

JIM LEHRER: And so the — what happened on Wall Street today, this — quote — “surge,” should be seen as not a sign of anything beyond that, right? In other words, these — they read the same numbers that we just talked about, the people on Wall Street, and yet the market went up today. But that shouldn’t be read as an indication of that, correct?

GREG IP: Not until it kind of like breaks out of this range it has been in, in the last month or two.

I mean, the markets will eventually smell it if things are getting a lot better. And, by the way, there are some positive signs. For example, the crisis in Europe seems to be easing. Tomorrow, Friday, we will get the results of so-called stress tests on European banks. People are increasingly confident that there will not be a disaster in the European banking system.

So, perhaps, in a month or two, we will have sort of put this soft patch behind us.

JIM LEHRER: OK. Greg, good to see you again. Thank you.

GREG IP: OK.