The Campaign Spot

Economy in Turnaround? Or Hitting a False Bottom?

The good news is that the change in mark-to-market rules has the markets thrilled. The Dow Jones Industrial Average is at 8,032 right now; on Inauguration Day 2009, the DJIA closed at 7,949.09.

That’s the good news. The bad news:

The number of people filing initial claims for unemployment benefits unexpectedly rose last week, while those filing continuing claims hit an all-time high for the 10th straight week, according to a government report released Thursday.

This is separate from tomorrow’s jobs report.

As I understand it, there are two schools of thought among those following the market. One is that because we’re seeing some small improvement in most economic indicators between January and February, we’ve hit bottom, the worst has passed, and the economy should be picking up steam from here on out.

Then there’s the argument, and assessement, from Merrill Lynch’s departing economist David Rosenberg, spotlighted by Henry Blodget: No economic recovery can be sustained until there is a bottom on residential real-estate prices, and he calculates that housing prices stop declining when there is an eight-month supply remaining. “Even if the builders were to declare a moratorium immediately – that is taking starts to ZERO – demand is so weak and the unsold inventory so intractable that it would now take over three years to achieve the holy grail of price stability in the residential real estate market.”

His conclusion: “The combination of a 10 percent savings rate and 10 percent unemployment rate is a lethal deflationary combination that the Obama dream team of economists seems prepared to fight hard against, and we wish them good luck, but we think we are in for another year of very weak economic growth.”

As with everything else . . . we will see.


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