Difficulties in Reading the Tea Leaves

Caroline Baum tackles some more of the puzzling aspects of the US economy today:

U.S. Economy's Mixed Vital Signs Flummox Experts

May 22 (Bloomberg) -- U.S. economic growth has slowed to a crawl; the stock market is soaring. Housing is in a recession; construction employment has yet to show any effect. Employment growth is decelerating; weekly jobless claims have tumbled in the last month.

That's just a short list of the U.S. economy's conflicting vital signs, serving to keep forecasters off balance and Federal Reserve policy makers at bay.

... Employment has offered up its share of mysteries in this business cycle.

"If real GDP growth has slowed as much as it has, and potential growth doesn't change that quickly, how is it that unemployment has come down and been maintained at a low level?" says Neal Soss, chief economist at Credit Suisse. "Maybe the productivity downshift was structural rather than cyclical."

None of the answers is compelling or satisfying.

...Then there's the mystery of capital spending.

"Usually when you see huge stock buybacks you see good capex," Soss says.

Instead, investment in equipment and software hit a wall late last year, with the year-over-year growth rate slowing to less than 1 percent in the first quarter of 2007 from 9 percent a year earlier.

"Corporations didn't just figure out last October they're supposed to invest in China, did they?" he says. "The answers aren't satisfying."

Stuff worth thinking about. Personally, I think mixed signals are pretty much normal for an economy that is slowing down. My best description of the economy right now is that we're on the fence. In the next six months I think it likely that we will either move toward recession - which I see happening much like the 1990 recession - or toward renewed solid economic growth, perhaps along the lines of the second-wind expansions that happened after non-recessionary economic slow-downs in 1985 or 1994.