Capital Markets

Fodder for the Bulls

With the unemployment rate falling, productivity rising, and unemployment claims on the decline, you can hear some snorting from the barn.
Stephen TaubMay 8, 2008

If you listen to the naysayers, you would think the proverbial sky were falling.

The economy is in a recession, oil is going to $200 a barrel and everyone is losing their mortgage and being thrown out of their home. Or so the pessimists want us to believe.

Of course, none of that is currently true. In fact, in recent days there’s been a flurry of economic reports that actually suggest things may not be all that bad off—and that they might getting better.

Last week, for example, the unemployment rate fell—to 5 percent from 5.1 percent—instead of rising, as some pundits had predicted. On Thursday applications for unemployment benefits fell by a much larger number than economists had been looking for. Thus, although the employment picture isn’t robust, it’s not exactly shabby.

Further, the Associated Press pointed out that monthly retail sales reports issued on Thursday were better than expected, led by discounters Wal-Mart Stores Inc. and Costco Wholesale Corp. Pricier, mall-based companies didn’t fare as well, however—suggesting that when the going gets tough, Americans shop for better value.

Meanwhile, the Labor Department on Wednesday reported that productivity rose at an annual rate of 2.2 percent in the first quarter. That was higher than the 1.5 percent increase that had been expected, according to the Associated Press.

What’s more, while many of the largest financial institutions have taken multi-billion-dollar writeoffs and the housing industry continues to struggle, many other companies are reporting first quarter earnings that exceeded Wall Street expectations, although those forecasts were modest in some cases.

The higher-than-expected earners include construction and engineering companies like Perini Corp. Other companies that beat estimates this week include Walt Disney Co., which said attendance to its parks remains strong, and Cisco Systems.

Such announcements partly explain why the stock market has been rallying since March and why the Dow Jones Industrials and other indices are near break-even for the year after tumbling in the first two months.

To be sure, prices for oil and food are rising sharply, crimping the budgets of many consumers. And major industries like the airlines are struggling to keep up with these spiraling costs.

But if the pundits who contend that the surge in oil prices stems heavily from investor demand and not supply-demand imbalances are right, the price of crude will tumble once hedge funds and other aggressive investors move out of energy plays and into the stock market and distressed bond investments. And that would confirm what some of the bulls are saying.