by Michael Roberts
Stockbrokers and financial analysts were ecstatic yesterday when
the famous Dow Jones stock index for the 30 top companies in the US
passed its all-time high and went above 15,000. It was another
landmark in the current rally in financial assets around the globe.
The only way is up – it seems. The Dow index was at 14,000 just 66 days
ago and is now up by 129% since the 2009 trough. The other US stock
index, the S&P-500 reached all-time highs earlier last month. And
the UK index, the FTSE 100, also doing well. Graphs from Doug Short’s
But does this imply that the world capitalist economy is now finally
making a significant recovery in growth, investment and jobs after the
Great Recession? Well, the first thing to say is that the US stock
market is still in a bear market, despite its recent spectacular rally.
When inflation is stripped out of the equation, the S&P-500 index
is up 89% from its 2009 low but it is still 22% below its 2000 peak,
which kicked off a bear market in equities that has lasted 13 years and
bear markets in the past have lasted anything between 15-20 years
(see my post, https://thenextrecession.wordpress.com/2013/03/30/its-still-a-bear-market/).
This stock market boom does not reflect an anticipation of sustained
economic recovery. It really indicates the massive amount of credit
that has been created by central banks around the world. The monetary
authorities have cut interest rates to near zero, the latest reductions
being that of the ECB (-25bp) and Australia’s RBS (-25bp) in the last
week. And the major central banks continue to ‘print’ money through
so-called ‘quantitative easing’, the most recent and ambitious being the
programme of the Bank of Japan to print as much money as it can to
drive up inflation (not growth)!
Most of this credit is not finding its way into the ‘real economy’,
however. Instead it is fuelling a bubble in financial assets, such that
even the governments of economies in deep recession, like Italy, Spain
or Portugal and Slovenia, can sell their bonds into the market at
reduced interest rates (see my post, https://thenextrecession.wordpress.com/2013/03/04/you-cant-make-a-horse-drink-2/).
While the US stock market explodes upwards, the latest quarterly
earnings results of top 500 US companies reveal a less rosy picture.
Sure, corporate profits remain near all-time highs but 44% of US firms
reported lower than expected sales, with revenue growth slowing.
Cost-cutting and refusing to invest significantly remains the main way
that US companies have sustained high profits. But corporate profit
growth has slowed to a trickle, so stock market investors may be in for a
rude awakening soon.
And the story on activity in the real economy is little changed,
despite the stock market’s view. Sure, the UK avoided a ‘triple -dip
recession’ according to the data for the first quarter of this year,
but real GDP growth is unlikely to be more than 1% this year. And sure,
US jobs growth in April was in line with a trend of slowly reducing
unemployment, but mainly through the creation of part-time and temporary
Actually, the US economy took a slight downturn, according to the
measure of business activity I have developed from the US ISM data for
manufacturing and services activity. The combined ISM index shows that
the US is still in low-growth mode and, if anything, turning down.
A more high-frequency indicator is that provided by the ECRI. Their
weekly indicator for the US confirms that the low growth mode is in
place, although the ECRI suggests a slight uptick in April.
But what is really interesting is that the world economic activity
indicator from Markit PMI dipped in April and is now only just above the
50 threshold for showing economic expansion. For the first time, the
world PMI score is below that of the US, Japan, the UK and China
combined. It seems that, outside these major economies, the expansion
of activity is slowing. Of course, the Eurozone remains depressed and
The stock market may be booming, but the world capitalist economy is still crawling.
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