Econowatch

Being right is much, much better than being wrong. In business being right can make you rich, and being wrong is often a firing offence. And right now, on Bay Street, Wall Street and in every other financial capital, the world is dividing into two camps. One is right, the other is wrong, and no one really knows for sure which group is which.

On one side are the bulls. They believe the worst of this economic and market crisis passed months ago, and the worldwide efforts to stimulate trade and commerce are working—not perfectly, but adequately. Sure, the recovery might be pretty anemic, and jobs will continue to disappear for some time. But by the end of the year, they say, the world will feel like a much more stable place. For the past three months, the bulls have been talking (and talking and talking) about “green shoots” and early signs of an economic spring. Fuelled by a strong rise in stock markets, this optimistic thesis has become the dominant storyline.

On the other side are the bears—grumpy pessimists with increasing hostility toward the happy talkers. The bears remain convinced that there is at least one more painful chapter to this downturn, and maybe more. This week, the economic gods seemed to confirm their warnings. David Rosenberg, Gluskin Sheff’s renowned chief economist and one of the dominant males in the bear clan, offered a list of five “brown shoots” suggesting that the market and the economy are headed for an unpleasant reality check in the months ahead. These include a surprise drop in consumer confidence in June; continued declines in U.S. house prices; deteriorating chain store sales at the end of last month; and the fact that the Canadian economy was still shrinking in April. Then came the 467,000 jobs lost in the U.S. in June—far more than expected.

Maury Harris, an economist with UBS in New York, issued a plea for calm on behalf of the bulls last week, urging clients not to read too much into last month’s labour market massacre. That about sums up the bullish case: this is but a pebble on the path to recovery.

Perhaps Mr. Harris and the bulls are right. We should certainly hope that they are. But commodity prices have lurched into reverse lately, and both the Dow and the S&P/TSX have fallen a little over six per cent since the beginning of June. That’s a swoon. We will soon find out whether it’s the beginning of a fall. Being wrong has never been such an unpleasant prospect.

GRAPH OF THE WEEK: Worse than we thought

In January, the Obama administration released a chart showing its forecast for the U.S. unemployment rate with and without the recovery plan. The line in red shows the actual unemployment rate since then. Some say this proves the stimulus package isn’t working—others say it proves we’re not doing enough.

THE GOOD NEWS

Recovery pending
For the fourth straight month, pending home sales rose in the U.S., which could finally signal the end of real estate’s free fall. The National Association of Realtors’ pending sales index, which tracks contracts signed to buy previously owned homes, eked out a
0.1 per cent gain in May. Many experts took it as a sign that buyers are being lured back by low prices and attractive interest rates.

Better service
Coming on the heels of June’s brutal jobs report, an improvement in the ISM non-manufacturing index got no love from investors. Still, the index, which measures America’s service sector, rose to 47 from 44 in May, beating expectations. While the sector is still in negative territory (50+ equals growth), employment and exports both showed marked improvement.

GM rising
The company formerly known as America’s economic engine, or GM, got clearance from a judge to sell most of its assets to a new entity. The decision removes a major hurdle to GM’s emergence from bankruptcy protection. Good thing. Washington said it won’t offer any more bailout money after July 10.