Three Reasons Why This Week's GOOD NEWS Isn't Really That Good

The economic news this week was, on the surface, unusually positive. Stock markets soared—especially on Tuesday—and are posed to end the week with the strongest percentage gain in months. The Canadian dollar is edging closer to par, and oil has topped $US 100 per barrel. Employment data released this week points towards the US adding jobs, and the American unemployment rate fell to 8.6%, the lowest it’s been in years.

But along comes Dr. Realism, pointing out that sometimes good news is only bad news in disguise. Here are three reasons why this week’s upbeat economic news is actually not much reason for celebration after all.

First of all, the mid-week surge in stock markets around the world was driven by the coordinated efforts of six central banks around the world (including the Bank of Canada) to provide liquidity to imperiled European banks.

In non-economist language, the message to Europe is: “You need money?  Here—take some money. We’ll lend it to you.”

Given the turmoil in Europe and the exposure many European banks have to the bad debts of some sovereign governments, the fear is that Europe will be gripped by a credit crisis. This was what choked the US (and global) economy back in 2008-09—when everyone stops lending, no one can access credit—and the economy crashes. The lifeline provided by the non-European central banks to provide liquidity to European banks cheered investors.

But the underlying message here is far more sobering. It’s very unusual for central banks to take such sudden, coordinated efforts, and it signals that Europe’s economic health is in critical condition. When the defibrillator comes out in the hospital emergency room, there is no reason to cheer. The defibrillator may indeed save the patient’s life, but it is a clear sign of desperation.

Furthermore, the central banks’ lifeline to Europe does absolutely nothing to help solve the root causes of the problem. Debt is still debt, and while extended lines of emergency credit could prevent a complete catastrophe, Europe is still in deep trouble.

Secondly, the fact markets rallied this week is without question good news for investors. November was starting to look worryingly similar to the autumn of 2008, when market sentiment was driving the value of stocks into the toilet. But what was driving the enthusiasm this week? Not much—at least nothing substantial.

To be certain, Canadian stocks were being lifted by some great quarterly reports from some of the Big 5 banks, and energy stocks benefitted from higher oil prices. But the really big rally came on the news of the central bank action. There was nothing this week that increased the actual value of every publically traded company by 4%.

The bad news here is that market volatility is still with us. Investors are still rushing wildly in and out of markets, sometimes on the most insignificant piece of economic information. Volatility tends to shake consumer confidence because just as quickly as investors rush to buy stocks, they can just as quickly bail out. This week’s market rally was welcomed, but if it wasn’t driven by anything really substantial, it could prove to be short-lived.

Finally, the US jobs report showed the American economy added 120,000 jobs in November, and that the unemployment rate dropped from 9.0% to 8.6%—the lowest it’s been since March 2009. That sounds good (and markets rallied on the data), but scratching below the surface the news is less positive. The addition of 120,000 jobs is still far too weak to do much to get the US back to its pre-recession level of employment.

But more troublingly, the unemployment rate plunged not so much because of new jobs created, but rather because American job seekers are becoming discouraged. The unemployment rate is the percentage of people in the labour market looking for work. If you stop looking for work altogether, you drop out of the labour market. That’s what is happening currently. A shrinking labour market in the US because people are giving up is pushing the unemployment rate lower. And that is hardly good news.

The global economy is teetering, and in times like this it is always important to not panic and look on the bright side of things. There is never a good reason to be overly pessimistic.

Yet at the same time, realism is important too. Some weeks the economic news is good, and some weeks it is bad. And some weeks—like this one—the news seems good, but is actually not that good at all.

---