Passing Grades from the Stock Market Schoolteacher

Like an inner-city schoolteacher, the stock market has been handing out high marks to the economy…just for showing up. Unfortunately, the economy never scores a passing grade on any of its achievement tests.

Maybe it doesn’t matter that this F-student strolls home from Wall Street each day with an A+ and a smiley-face stamped on his homework. But we do worry that the stock market might begin handing out grades the economy actually DESERVES. So we would not be a very aggressive buyer of US stocks (at their current elevated prices) until the economy’s achievement tests show signs of genuine improvement.

That’s not really happening yet…

Maybe the economy is less bad…maybe…but it is still very far from good.

A few economic indicators – like industrial production, factory utilization, auto sales and consumer confidence – have bounced off their recent multi-decade lows. But these indicators still languish far, far below their recent “Bubble Era” highs.

Meanwhile, several other indicators of economic vitality indicate no vitality whatsoever. Unemployment continues to soar, for example, while consumer credit continues to plummet. The chart below presents the REAL unemployment rate – not the cosmetically enhanced number that captivates Wall Street on the first Friday of every month.

US Labor Force vs. Consumer Credit

According to last Friday’s report from the Labor Department, 10% of the labor force is unemployed. That’s bad. But the actual unemployment rate is far worse. After including under-employed and “discouraged” individuals, the unemployment rate soars to more than 17% of the work force!

Workers who don’t work have a tough time getting a loan. Not surprisingly, therefore, consumer credit continues to plummet. The math is pretty simple, folks: declining incomes and declining credit add up to declining consumption…which is not a great trend for an economy that relies on consumption. Therefore, as the owner of one of the nations’ largest shopping malls quipped recently, “Flat is the new up.”

Following this line of thinking, “miserable” is the new “bottoming out.” The chart below depicts a housing market that is truly miserable. And yet, this is the very same housing market that so many economists and Wall Street analysts declare to be “bottoming out.”

We don’t see it. In fact, we would repeat the identical prediction we offered up nine months ago: “The housing market is ‘bottoming’ like an anchor that has just snapped its chain above the Marianas Trench.” (We made our remarks in response to this declaration by David Wyss, chief economist with Standard & Poor’s: “We are seeing a bottom in housing sales.”)

To be sure, some bits and pieces of the housing market are showing signs of life…or at least non-death. But the guys and gals who actually build houses are seeing no recovery of any kind.

Home Builder Index Since 1980

The chart above shows the pathetic trajectory of the National Association of Home Builders Index. According to the Association, its index is “based on a monthly survey of home builders of single-family detached homes, and is comprised of three survey components: present sales, six-month sales expectations and traffic of prospective buyers… A reading over 50 suggests more survey participants are seeing ‘good’ economic conditions than ‘poor’ ones for home sales.” The Association does not explain what the current reading of 16 would indicate, but since 16 is 34 points below 50, we can safely infer that conditions are not “good.”

No matter how many A’s and smiley faces the stock market hands out to the economy, this kid still looks like an F-student to us.

The Daily Reckoning