Bears, Bulls, Chickens and Pigs: wOw’s Wall Street Weekly with Liz Peek (Week of 5/11) 

Editor’s Note: Liz Peek is a financial columnist and the author of wOw’s SHEconomics.

I miss the rally! After an eight-week fiesta that drove the S&P 500 index up 37%, the stock market remembered this week that we are still in a recession, that the autos are going broke, that the credit markets are still tangled up in Juicy Fruit, that the Obama administration is driving government deficits into the stratosphere and rewriting the rules of our economy along the way, that jobs are scarce and that taxes are going up. Darn!

We are at an inflexion point. Investors have determined that the world’s economies are not headed for extinction, but they are not at all clear on just what the recovery will look like. 

There is no shortage of opinions. The Dalai Lama has weighed in, fingering greed, speculation and a lack of transparency as triggering the financial crisis. (Sounds like he’s been hanging out in the White House.) A popular social diarist in New York depressed hundreds of lunching ladies this past Wednesday by predicting that it would be ten or fifteen years before things get back to normal. Alan Greenspan, James Wolfensohn, Fed Chair Bernanke, my doorman – everyone has a view.

The truth is, nobody knows. An AP heading this morning says it all: “Stocks are set for a lower open after data showed consumer-level inflation was flat last month, as expected.” Huh? If it was expected, why would that send the market lower? Only because the stock market, which in its weird way always seems to anticipate what’s coming next, has entered a “show me” phase. Rightly so. Recent gains have been fueled by signs that the rate of decline has dropped; that’s a welcome change from the accelerating collapse earlier this year, but declining declines won’t produce rising earnings. We need to see the “green shoots” take root.

Where will growth come from? That’s the tricky question. It’s pretty clear that any upturn in consumer spending – 70% of the economy – is going to be sluggish. The savings rate recently topped 5%, explaining poky retail readings. We know that past spending was boosted by massive withdrawals of home equity, which is no longer available. Meanwhile, the luxury of dropping oil prices has turned around of late, as has the decline in mortgage rates, which caused a tidal wave of beneficial refinancing. As is typical in this phase of the cycle, job losses are continuing. With unemployment at 8.9%, wages aren’t going up, and hours worked will likely only creep higher, with employers reluctant to add workers until the recovery is assured. The consumer, in short, is still in the deep end of the pool, trying to keep her hair dry.

Could the economy get a boost from capital spending? Doubtful. Corporate profits drive outlays for new plant and equipment; first-quarter earnings were off about 35% year-over-year. Moreover, capacity utilization for manufacturing in March fell to a record low of 65.8%. Why would companies expand plant? At the same time, office-vacancy rates are just beginning to drop, in part because construction boomed prior to this recession.

There is some optimism that export demand will boost GDP in the United States. Unfortunately, that hope also is being voiced in Germany, China and just about every other manufacturing country. Who’s going to be doing the importing? Unless we’ve unearthed a lost Atlantis of spendthrift consumers, it’s unlikely that exports will drive growth.

This pretty much leaves the government as the engine of last resort. Of course, this is why government spending is meant to climb as a portion of total GDP during recessions. However, investors are beginning to question whether the government’s “pump priming” will decline once the private sector regains its footing. Increasingly, investors are concluding that the Obama administration’s ambitions will drive deficits higher, and higher still.