07/24/2013 09:46 am ET Updated Sep 23, 2013

A Fragile Economy

The U.S economy is beginning to resemble a house of mirrors. Look to the left and you see a sluggish economy, look to the right and you see a stock market hitting an all-time high, and look behind and you see an 800 pound gorilla -- the Federal Reserve -- sending contradictory signals about the future of its Quantitative Easing (QE) policy. What is a business CEO or a market investor to make of these different images of the economy and the investment environment?

Many assumed the September Federal Reserve meeting would bring an announcement of the start of tapering of QE. That now seems unlikely because the second quarter gross national product is likely to be under 1 percent real annual growth, which follows the first quarter's squishy 1.8 percent. The third quarter growth is the subject of substantial debate with many suggesting it will be in the 2 percent range while more bullish forecasters have it bumping up to 3 percent.

So what's the picture on the real economic fundamentals at this point? Export growth, new investment spending and, of course, government spending have all been slowing. In addition, manufacturing is flat because of a slowdown in export growth and a continued uncertainty of what Washington will do about budget, tax and healthcare issues.

All this leaves the economy riding on the back of consumers. Consumer confidence has been healthy due to modest improvement in both housing and employment. But even some of this is now in question as recent soft housing numbers due to rising mortgage rates suggest that consumers are finally beginning to retrench -- retail sales have been weak.

Turning to that real funhouse mirror -- the stock market -- it has risen 15 percent this year, driven largely by belief that economic data will improve in the second half of the year and fueled by the injection of new money into the banking system by the Fed. Between January and the start of the tapering talks in May, the stock market added $2.8 trillion in market value. However, the real U.S. economy expanded just $500 billion. Given this huge gap between the stock market and economic fundamentals, one can logically conclude that roughly three-quarters the stock market increase has been due to the Fed's QE initiative.

In sum, the economy is still quite fragile and will remain soft this quarter. Given the weak condition of Europe and the slowing Chinese economy, it is highly unlikely that the Fed will significantly tighten monetary policy much before the end of 2013. In other words, markets are going to swim along on the surf of QE for the rest of this year. The fundamental economy does not at this point show any major drivers for economic growth above 2 percent. Given this huge gap between the stock market and economic fundamentals it would be wise for business leaders and investors to be cautious about betting on a strong second half of economic growth. In fact, given the potential for renewed budget confrontation in September we could see renewed economic and market volatility.

Jerry Jasinowski, an economist and author, served as President of the National Association of Manufacturers for 14 years and later The Manufacturing Institute. Jerry is available for speaking engagements. July 2013