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Thursday, July 31, 2003

Jubak on the economy's mixed signals

Jim Jubak's latest CNBC column does a good job explaining some of the contrary-seeming evidence we're seeing regarding the recovery that may be on the way (see post on Samuelson below for more on this issue). In particular, Jubak explains why consumer confidence is falling as Wall Street analysts' expectations are rising:

"So why such different reads on the future from consumers on Main Street and analysts on Wall Street?

"The conventional explanation is that consumers are pessimistic because their emotions are so heavily influenced by the continued high level of unemployment. If you’re worried about keeping your job, and many people are these days, then you’re likely to be pessimistic about the future.

"Wall Street tends to dismiss the jobs worry. Unemployment is a lagging indicator. The number of unemployed actually keeps rising for a while even as the economy recovers because an improving economy draws workers who had given up looking for a job back into the hunt. Since companies are reluctant to hire new workers until they’re convinced a real recovery is under way, the number of people employed doesn’t rise during the early stages of a recovery either."

However, he doesn't have much of a resolution to the puzzling question of whether a recovery is coming for the second half of the year or not:

"A third of the way through the third quarter, the recovery remains hard to identify. So investors looking for guidance on the market have their choice of consumers, who may be too backward-looking, and analysts, who may be too forward-looking. One side or the other will be wrong. Investors just don’t know which yet."

I believe that it's impossible to answer the recovery question given the available evidence and economic knowledge. As always, investments should be made for the long term, not as bets on what will happen just over the next few months.