'A' For Effort, But Washington Fails to Kill the U.S. Economy

Shutdown? What shutdown? Stocks are climbing and forecasts are growing rosier. REUTERS/Mike Theiler

Could the nation’s economy be so lowly rated as to be underrated? Perhaps.

If the Dow’s rally to its 35th record high of the year at the start of the week is any reflection of what the future holds, it seems the sturm und drang marking the run-up to the Congressional shutdown last month may have been overplayed – and may even be making way for gains in the New Year.

“The stock market is always forward-looking so, to that extent, you can be pretty optimistic,” says Neal Wolkoff, former chairman and CEO of the American Stock Exchange, now part of NYSE Euronext. “It’s saying as far as corporations go, there is the expectation of expansion ahead. It’s not necessarily an indicator for today. The stock market may be telling us that in a few quarters the market could be better.”

The latest raft of economic reports appears to back up that prognosis. Jan Hatzius, chief economist of Goldman Sachs, came right out and said it this week, stating he saw “little evidence” that the “fiscal follies” in Washington “materially impacted” the U.S. economy.

Hatzius now forecasts a growth rate of 3 percent to 3.5 percent in 2014 and “above-trend growth” in the first quarter, based on a “meaningful acceleration in real consumer spending,” an uptick in capital spending fueled by improved credit availability and a deal by both parties in Congress that resolves their remaining fiscal issues.

For the record, Hatzius is no Wall Street Pollyanna. He was widely praised for his bearish forecasts leading up to the much bigger financial crisis of 2008.

On cue, the Dow came out of the gate this week notching a new record high of 15,783.10, even amid low trading volume over the Veteran’s Day holiday. The market retrenched as investors trickled back in Tuesday, sliding 0.2 percent to end at 15,750.67.

The Dow has climbed five straight weeks and is now up around 20 percent on the year – outstripping the leaps of the past decade. Not since 2003, when it rose 25%, has the market performed so well. Pretty good, considering this is what many continue to call the “jobless recovery.” The latest rally, in fact, came on the heels of rosier-than-expected October jobs data, in addition to key business surveys that, as Hatzius says, “all surprised on the upside.”

Meanwhile, J.P. Morgan put out a report a few days ago observing that the global economy  “is cruising at trend pace near 3 percent, even as the recovery broadens.”

That is not to say everything is coming up roses, says Wolkoff, these days a securities and derivatives consultant at his firm Wolkoff Consulting Services LLC in South Orange, New Jersey. “Unless you are eight years old, the numbers you’re seeing right now are still kind of horrendous,” he says, noting the recoveries following recessions in both the 1980s and 1990s were more impressive. “You can’t really yet call it a thriving economy.”

The stock market rally might even be a little bit deceiving, says Raymond Carbone of Paramount Options in New York. He says that investors are flocking to the stock market from competing markets – such as commodities – because volatility has tanked in other markets and, therefore, hurt traders’ ability to make money off zig-zagging prices.

“Lots of volatility and movement means lots of opportunity, while lack of movement means people go elsewhere,” he says. “I don’t think the stock market gains are really being driven by a robust economic picture so much as a taste for higher returns. There is a lot of money on the sidelines that’s not participating in this for that reason.”

Volatility in commodities such as oil and gas and other energy products are at 20-year lows, he notes. Not so with stocks, which are offering the types of pops and drops that are an investment manager’s bread and butter. “Stocks,” he says, “are stealing all the thunder.”

Looking toward the holidays, a nationwide survey released Tuesday by the National Association of Convenience Stores in Alexandria, Virginia, signals an end to three months of consumer pessimism. “Overall, consumers feel more optimistic than they have since August and that bodes well for retailers of all types seeking strong holiday sales to end the year on a positive note,” it predicted.

Typically, consumer optimism rises in tandem with a decrease in prices at the pump. Accordingly, the latest monthly survey sees a majority its respondents expecting gasoline prices to fall.

There may be some speed bumps in the immediate offing, however. Morgan Stanley projects this holiday season may be the weakest since 2008, the year the financial crisis crushed spending en masse. “Consumers’ willingness to open their pocketbooks is less clear than their ability to spend,” the bank said. “But in 2014 we expect cumulative gains in wealth.”

The final quarter of the year will bring underwhelming economic growth of around 1.5 percent, Goldman predicts, “although the economy should gain momentum” going into next year.

“I would say right now we are just skimming along,” Wolkoff says. “This is not yet a full-blown financial recovery.”

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