Econowatch

It would be nice if the markets and trade and employment worked like mathematical equations. After all, economic reports are full of numbers and percentages. You’d think it’s primarily about math. But it isn’t really. Predicting an economy’s direction is not unlike forecasting the weather—it is subject to certain scientific fundamentals (i.e., the weather gets warmer when our hemisphere is tilted toward the sun, and the closer you get to the equator) and a whole lot of scientifically based guesswork (i.e., that low-pressure system should be gone by tomorrow afternoon).

Economics is even more inexact because it tries to foretell the behaviour of human beings—billions of them. And while our tendencies are roughly predictable over the long run, the short term can be incredibly messy, especially when fear gets involved. That’s why you can get synchronized global stock market plunges, like the one we saw early this week, and be at a loss for a credible explanation.

It started with a few rumblings last Friday over the surprise decline in U.S. retail sales in July. By Monday it was a full-blown commotion, fuelled by stories out of China suggesting the government was set to clamp down on borrowing to nip fears of a developing stock market bubble. In Shanghai, stocks tumbled by six per cent and every other market soon followed the downward trajectory.

That in itself wasn’t terribly surprising. Markets have been surging ahead for almost six months now, and there are plenty of reasons to think that investors have gotten too giddy too soon. By many measures, stocks are looking rather expensive given that the weather forecast is calling for a fair bit of cloud ahead as this nascent recovery moves forward. Prices for many consumer goods are still drifting lower; jobs are still being lost by the stadium-full; U.S. bankruptcy filings are up a staggering 37 per cent from a year ago.

But the real problem isn’t really rooted in any of those numbers; it’s in the very mixed messages that all of those figures send. Economists and politicians are increasingly upbeat. But all around, people can see the wreckage of the past 12 months, and they’re constantly warned that things won’t soon go back to the way they were. Does any of that make you feel like treating yourself to a new car?

Recoveries are based on faith not math. And faith is both fragile and fickle. This is what the meteorologists call “unsettled weather.” Translation: better bring an umbrella.

GRAPH OF THE WEEK: The rich are earning more than ever

A paper from University of California’s Emmanuel Saez shows an unprecedented disparity in U.S. incomes. As of 2007, the top decile of earners took home 49.7 per cent of total wages—a level higher than in any other year since 1917.

THE GOOD NEWS

Manufacturing
In June, Canadian manufacturers clocked a 1.9 per cent increase in sales, shipping $39.7 billion worth of aerospace parts and oil products to customers. The news was cautiously welcomed by economists, who’d predicted only a o.2 per cent gain. At the same time, exports also rose 2.3 per cent to $29.3 billion, after sliding for four months. Most of the increase came from surging oil prices and not an increase in volumes.

Vive le recovery
Both France and Germany grew their economies in the second quarter, taking the first steps to lead Europe out of recession. The increase in GDP was meagre (just 0.3 per cent) but it was enough for German Chancellor Angela Merkel to declare that country’s recession “over.”

Beat it
U.S. companies are making less money than they were last year, but more than analysts thought they would. As earning season draws to a close in America, 72 per cent of companies that have reported results have beat analysts’ expectations. Take Wal-Mart. Even though sales fell 1.4 per cent to US$100.8 billion, it earned 85 cents a share, three cents more than expected.