If Manufacturing Is So Bad, Why Did the Market Go Up?

The Institute for Supply Management's December index of manufacturing activity plunged to its lowest level since the recession of 1982, and as this chart shows, the index is consistent with GDP growth in the fourth quarter of last year of -6%, which would also be the worst since 1982. With numbers this bad—and technically worse than expected—why was the stock market up on Friday, extending gains that began last November 21st?

There are several possible explanations. The one advanced by the press is that investors are encouraged by all the talk of an aggressive Obama stimulus plan, since it would all but guarantee an economic recovery.

In my view, the bigger Obama's stimulus plan is, the worse it is for the economy. But I think the market has already priced in an egregious spending plan. The expectation of a massive expansion of government and attendant tax increases was one of the principal reasons that the market has been so depressed in recent months; so depressed, in fact, that prices fell to levels that were consistent with an economy that was worse than the worst of the Great Depression. By this logic, today's disastrous ISM number fell short of the market's true expectations.

Another reason the market is up is that the economy may have passed an inflection point; that it is decelerating but at a slower and slower pace. The financial markets have shown impressive signs of healing in recent weeks—lower swap and credit spreads, declining volatility, slowly rising T-bill yields—and commodity markets are now showing signs of bottoming at levels that are still significantly higher than the all-time lows of late 2001. This crisis began with a severe dislocation in the financial and housing markets, and we have now seen substantial repricing activity, a return of liquidity, and much lower financing costs; it is not unreasonable at all to say that the financial and housing storm is passing.

This crisis impacted the broader economy first through a massive decline in housing construction which began three years ago, then by way of a near-collapse of the banking industry earlier this year, and finally through a panic-induced decline in demand in the past few months. Remove the underlying cause of the problem—fear of losses—and you find that the vast majority of the economy remains intact. Economic life does indeed go on all across the country, even as many companies and many displaced workers struggle.

Comments

[socrateazz:]

Hmmm Did economic life continue through the great depression? Did the Market not ralley at times? What made things bad during that time? Are the problems solved, delayed or changed to new problems? Constuction projects will make a temporary improvement in the economy with a slight net improvement. More Government jobs will have an early net improvement followed by a drastic negative impact on the economy. Bailing out companies will have a good immediate impact followed by a net negative impact by companies being on welfare too! Are we past the tiping point causing a dictatorial result? Maybe! Massive building projects often proceed economic failure? Did it happen in Egypt? Greece? Roman? Read the history and decide how things were 20 years after those great construction projects. They are implemented because the nations already had accumulated wealth. Will the US wealth be spent on appearances of wealth? Probably! The Great nations have all followed the same pattern...Collection of wealth. build up wealth. utilization of wealth. Then the loss of wealth. History is based more on what is believed than what actually was.

Jan 04 08:50 AM

[prudentinve...:]

The economy cannot rebound in a stable and lasting way without structural re-balancing, a return to basics of what made the USA so prosperous in the first place. These basics were in place in the period following WWII and lasting, to an extent, until the 1990's era of financializing our economy. In summary, these basics included world leading universities, world leadership in science and applied science, i.e. engineering, a strong and advanced manufacturing powerhouse, and, of course, stable and equitable laws and financial markets that were more transparent and more liquid than the rest of the world's markets.

A meaningful stimulus package will need to create infrastructure of tangible value, not merely pay the bloated beaurocracies at the states. This means that the stimulus has to be less than the numbers being mentioned, and for a longer period than the quick shot being envisioned, because we do not currently have the workforce that can create tangible value to the tune of hundreds of billions per year. Our economy is overstaffed with bureaucrats and financial paper pushers of all stripes, and understaffed with skilled welders, iron workers, machinists, pipe fitters, electricians, concrete workers, etc. These are the valuable skills that we need to recover, and that our yuppified middle class now looks down upon as jobs only suitable for illegal immigrants, as they have grown to assume that "respectable" jobs involve pushing paper, not building or making things.

In conclusion, if we are going to spend stimulus on building useful things, it will have real value, not least of which is a rebalanced workforce with renewed respect for manual skilled labor and engineering. If we are going to spend it on pushing more paper, the only thing it will create is inflation.

Jan 04 08:56 AM

[CautiousInv...:]

I would not read too much into last weak's rally as volume was thin.

And your assertion that the economy is intact is simply wrong; consumers, in addition to facing rising unemployment, have lost $10 trillion of wealth. Moreover, we are in a global recession.

In an economy in which the consumer accounts for 70% of economic activity, it is important to ask where will demand come from?

Jan 04 08:56 AM

[investor88:]

Good article and comments. People are still sensible and not jumping with both feet into the stock market despite the rise of the Dow and Dow crossing 9000 pts.

Jan 04 09:05 AM

[tdillian:]

"In my view, the bigger Obama's stimulus plan is, the worse it is for the economy"

yep... could not agree with this statement more. good article!!

As for the press.. I wish someone here at SA would do an article on how many Obamabots control the press... and that includes the wire service AP (look at the board of directors -- filled with Obamabots).
They frame every issue to either give credit to Obama or to make excuses for him.

I am hoping someone at SA realises that this "crisis in confidence" is not just with the financial systems, it is with governement officials as well as the press.
I know for me, I used to read and watch the news so much, the wash post, NYT among others, and watch CNN and MSNBC, NBC, ABC, CNBC

what I started noticing is 1) most pundits are ignortant, and just use some buzzwords that are popular 2) the AP, CNN and MSNBC have on many occasions LIED or not told the whole truth, especially if it hurt their boss -- Obama.

I only get my financial and other news from reuters, a few other websites.. that;s it..

the trust is gone.. from government officials, from wall street, and from the press

and now I understand that the newspapers want a bailout as well... hmmm.. just start calling this whole thing the pravada..it is in practice now anyways..

Jan 04 09:31 AM

[Alan von Al...:]

Terrible spelling and punctuation, but I vote thumbs up anyway.

I agree that we're riding the Obama feelgood escalator, which ends in February, unless it breaks down before Inauguration Day. Remember the quants who underestimated black swan risk? This is a fragile rally. I'm trading from day to day, hour to hour. No investable ideas.

Jan 05 12:28 AM

[goldis4ever:]

"If Manufacturing Is So Bad, Why Did the Market Go Up?"

Stupid, gullible investors? Think Madoff.

Jan 05 08:10 AM

[secmaven:]

Prudent investor makes excellent points but I fear the financialization has cracked the productive eggs of our economy beyond repair. Much of our manufacturing base has been shipped overseas to be operated by low wage but equal skill foreign workers. Whatever stimulus policies the government adopts will not cause this capital to return to our shores or to be replicated here without destructive trade barriers.

Jan 05 11:35 AM

[Danny Newton:]

I don't see how you can exactly compare manufacturing now with manufacturing before 2000. The BEA changed the definition of exactly what manufacturing is.

Jan 06 06:06 AM