02/09/2012 10:56 am ET Updated Apr 10, 2012

Weighing the Economic Evidence

The New Year got off to a strong start as economic indicators and the stock market both have performed better than expected. The question is -- how much of this reflects fundamental economic strength and how much of it is due to the flood of liquidity that central bankers around the world are pouring into the system? Let's weigh the economic evidence.

There can be little doubt that America is experiencing an industrial renaissance of sorts as manufacturing companies report rising sales and strong growth. A relatively weak dollar is working in manufacturing's favor, but even more important are continuing efforts by manufacturing companies to be more globally competitive. We see the results in terms of rising industrial output, greater productivity, dramatic increases in profits, and significant increases in employment. The stellar pickup in the auto industry in particular, and the 50,000 gain in factory jobs last month, indicate that U.S. manufacturing is globally competitive and providing the recovery with additional strength.

The stock market certainly seemed to reflect widespread belief that the January jobs numbers mean that recovery is well underway as the Dow Jones Industrial Average jumped to a three-year high of 12,862. The NASDAQ also jumped to 2905, the highest number since 2000, based on hope that global growth would be strong enough to boost high technology equipment demand. The January stock market gains were the best annual start in equity growth since 1997. The market has already claimed what most Wall Street analysts were predicting would be roughly the total increase for all of 2012. Not bad!

But there is significant data to suggest that the economic recovery is still not on a strong, sustained path. The U.S. 4th quarter GDP increase of 2.8 percent was extremely weak when you look at its component parts. Exports were flat and inventory stockpiling accounted for 2 percentage points of total GDP growth. Final economic demand was less than 1 percent. Seen in the context of the recession that is occurring in Europe, one is left to wonder if the U.S. can sustain strong economic growth all by itself.

The epic increase in global money supply due to quantitative easing around the world is sharply boosting the stock market. In roughly the last year, the ECB has expanded its balance sheet by 40 percent, the Bank of England by 30 percent, and the Federal Reserve by 20 percent. To some extent, this can produce a stock market increase that gives a misleading impression of economic growth.

The question then is what is driving the stock market -- economic fundamentals or the global increase in the money supply. If you have an opinion on this, please share it with me.

Jerry Jasinowski, an economist and author, serve d as President of the National Association of Manufacturers for 14 years and later The Manufacturing Institute. Jerry is available for speaking engagements.