(March 6) – “Last Friday was an averagely astounding day on world stock markets. It started, in New York at least, with the news that service sector and construction jobs were not so numerous in the U.S. economy in February. The actual gain in jobs was about 200,000 less than in the two months before,” writes Peter Cook in this morning’s Globe and Mail.
“This piece of news, instantly digested, produced a 200-point rise in the Dow Jones industrials and a new record on the Nasdaq Stock Market. It also got exported, confirming in the minds of speculators in a dozen countries that U.S. interest rates will not rise so rapidly and, therefore, the world economy and their own particular corner of it will continue to boom.
“Many caveats could be made about the U.S. jobs number. For example, it is well known that mid-winter construction jobs come and go with changes in the weather. But to carp about such things is to miss the mood of the moment.
“Alan Greenspan, chairman of the U.S. Federal Reserve Board, has been saying that growth in the U.S. economy exceeds what is possible in the long term and inflation and higher interest rates are an inevitable result. Here, in the monthly job figures from Washington, was proof the economy was slowing. True, interest rates may still have to rise. But not by as much. Which means that every profitable company will be more profitable than anyone thought it would be previously. And so, naturally enough, its stock is worth more today.
“The reasoning is familiar. But, at its root is a fatal flaw that Mr. Greenspan, in his latest testimony to Congress, has uncovered. Beyond the other obvious signs of excess, such as an extremely tight labour market, a huge trade deficit and rising commodity prices, there is the stock market’s own effect on the U.S. economy to worry about. Far from the economy turning good and justifying a rise in stocks, it is the further rise in stock prices that should concern us.
“Here’s why. Investors who look at the evidence of a booming U.S. economy in which productivity continues to advance will bid up stock prices in anticipation of future corporate earnings. That, after all, is what happened on Friday and has happened on many other occasions. However, higher stock prices also make people feel wealthier and, to celebrate that, they spend more. The result is that one thing feeds into another. The wealth effect generated by a climb in stocks pushes up consumption fairly immediately.