Economy Keeps Chugging Along

09/10/2008 12:00 am EST

Focus: MARKETS

Daniel Wiener

Editor, The Independent Adviser for Vanguard Investors

Dan Wiener, editor of The Independent Adviser for Vanguard Investors, says the economy continues to tread water while the market puts out mixed signals.

Despite the subprime mortgage debacle, the lending retrenchment on both Wall Street and on Main Street, the slowdown in consumer spending as those stimulus checks wear off, and rising energy prices over the past year, the US economy, like Michael Phelps, just won't quit.

As I've said many times before, for all intents and purposes, this may feel like a recession, and for many people it is, but it sure isn't meeting the textbook definitions easily.

The report just before Labor Day that durable goods orders for July rose again, rather than contracted as economists and pundits had predicted, was just another piece of evidence that this economic slowdown is as patchy as supply and demand in the housing market.

A revised GDP report showing 3.3% growth in the second quarter, rather than 1.9%, proves that not all areas of our economy are in trouble. Nor are all real estate markets. And yes, if your credit is sound, you can still get a loan, though it may take a whole lot more paperwork to process.

That said, the slowing of foreign economies will almost certainly take a bite out of exports, which have supported growth here at home, as will the recent rebound in the dollar, should it stick.

Oil continues to catalyze the market. Earlier this year, rising oil prices meant falling stock prices. Period. Now that inverse relationship seems to be coming unglued. Some days oil rises and so do stocks. Sometimes it's just the opposite.

Have oil prices and stocks decoupled? Do rising energy prices indicate rising economic growth and, hence, are a good sign for stocks? Or do falling energy prices indicate lower inflation down the road, which is also a good sign for stocks? Or does falling energy mean a slowing economy, and that is bad for stocks?

The Federal Reserve remains caught between a rock (economic sluggishness) and a hard place (inflation) and now says its next rate move will almost certainly be a hike, when it happens. I don't know about you, but I haven't been holding my breath for a rate cut-and I've told you why plenty of times. The economy is still moving forward, albeit in slow-mo, and we can't afford to give inflation a better grip than it's already gotten on the backs of higher energy and food prices.

Thankfully, from an inflation standpoint, oil prices have been on a downward trend from their $147.27 [a barrel] high, based on fears of a more protracted US slowdown and the potential for a global slowdown. Neither Russia's belligerence nor the fact that we're now in hurricane season has had much of an impact just yet.

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