For about a month through mid-October, the U.S. stock market went down a certifiable "correction" amount of 10 percent, falling on one pivotal day as much as 460 points, based on multiple emerging fears of potential events that would undermine whatever progress the American economy was making after the terrible winter of 2014. And never mind the Great Recession, which many Americans think is still going on although it officially ended in 2009.
These fears included warnings that the U.S. was about to have an epidemic Ebola outbreak, that corporate earnings and forward guidance would disappoint and foreshadow a fourth quarter economic retrenchment, that the Federal Reserve would mistakenly become more hawkish and announce a quicker move to higher interest rates, that the strengthening U.S. dollar value would sink future earnings of American exporters, that Europe was going into recession while the European Central Bank was being held powerless by German bankers, that ISIS was about to overtake Baghdad, that Russia was about to invade the rest of Ukraine it was not already dominating and cut off the gas flow to Kiev and even the rest of Europe, that the Chinese economy, in the words of one trader on CNBC, was going "off the cliff;" that falling oil prices worldwide would threaten America's oil and gas fracking investment boom and prove more harmful despite the obvious relief for consumers at the gas pump, and, finally, that Japan was going to commit economic suicide by going ahead with a second national sales tax increase after the first one had already tipped its economy toward recession.
Since mid-October, however, the only one of these fears that has materialized was the official announcement of a Japanese recession, but the sales tax increase has been put off. Baghdad did not fall and ISIS was stalled for a time in Syria. Russia sent tanks into the area it already controlled but did not march on Kiev and actually signed off on a gas deliver deal with Ukraine. China did not implode: its GDP dipped by only point-one in the most recent quarter. Corporate earnings in the US were broadly reported to exceed estimates for both bottom-and top-line growth with only a limited number of companies citing a stronger US dollar as cause for lower forward guidance. European Central Bank head Mario Draghi reiterated the prospect that the Bank would pursue government bond buying to support the economy notwithstanding German objections. No Americans caught Ebola here, a threat that seemed to miraculously disappear, even in Texas, very shortly after the fear-driven election of November 4.
Meanwhile, the US reported GDP growth of 3.5% for the third quarter of 2014 that ended September 30, significantly above estimates and continuing the superb growth of 4.6% in the second quarter. Not surprisingly, the stock market recaptured its 10% loss and then some, winding up a couple of percent above its early October levels and reaching several new all-time highs. But even with the good news, a renewed chorus of naysayers immediately began to question the quick snap-back as "too far, too fast" or words to that effect, even though the 10% so-called "correction" had been provoked by rumor-mongering and irrational fears that turned out - equally quickly - to have little basis in fact, and simply did not materialize as predicted. Some confidently predicted a market crash again just as those had done in mid-October.
But again the stubborn facts have intervened, even if not many seem to be paying attention as the markets have essentially traded sideways as we head deeper into November and get our first taste of the kind of harsh winter weather that put our economy into reverse in the first quarter of this year. But despite the snows leaving Buffalo literally six-feet under thanks to a big chill over Lake Erie initially produced by the freakish remains of a Pacific Ocean cyclone, the blizzard of good news on the US economy keeps coming.
The jobs report for October showed another 200,000+ gain in net employment, with the unemployment rate down to 5.8%, continuing a streak of similar numbers that put 2014 on the path for the best year-over-year gain in employment since the last truly "boom-time" year of 1999. Weekly data for new claims for unemployment insurance have sent a similarly bullish message, with the number of those still receiving unemployment benefits after one week on the rolls (2.3 million) falling to the lowest level since December 2000. We are now clearly no longer in a lay-off pattern but rather in a consistent hiring pattern. Not good enough yet because many are still working part-time instead of full-time as they would prefer, and many have given up even looking for work.
Encouragingly, the Labor Department's latest monthly "JOLTS" (Job Openings and Labor Turnover Summary) report showed strong growth in openings at the end of September with a climb to 4.7 million. This indicates that there are plenty of opportunities to take off the labor-market slack. The Federal Reserve even noted directly that labor market slack seemed to be finally on the wane. The Feds also made clear in their meeting minutes that their main worry was not so much Europe or other areas of potential growth contraction internationally, but rather a persistent absence of "healthy" inflation toward their 2% goal. But the most recent Consumer Price Index data actually showed some signs of movement in the 2% direction despite the big drop in gasoline prices.
In addition, within the past few days, existing home sales have moved up 1.5% month-over-month, also showing the first-year-over-year increase since October 2013. Retail sales have come in above expectations as well, and consumer confidence has continued to surge over the past three months. Meanwhile, the Institute for Supply Manufacturing Index has shown a recent jump to a three-year high of 59 in October, up from 56.6 in September. Likewise, the Chicago Purchasing Managers Index, which has held well above the 50 level that indicates expansion, surged to 66.6 in October, well above the expected 60.0 level and up from 60.5 in September.
Most impressively, the Philadelphia Federal Reserve Bank Survey of Manufacturing Business Outlook Survey in the Middle Atlantic States (known as the "Philly Fed") exploded to an October level of 40.8 not seen since 1993, up from an impressive 20.7 in September. Additionally, the Philly Fed shows a wide disparity between the 49% of firms reporting increased activity for the month as compared with merely 9% who saw decreased activity.
The Survey's labor component also moved up a strong ten points, a three and one half year high. Dips in the Philly Fed have consistently been seen as a harbinger of downward pattern in the broader American economy, and vice versa. But the question remains whether the markets will perceive the extraordinarily positive results in this survey over the past two months as a true sign of a coming nationwide economic boom or will it succumb to another round of scare talk from the short-sellers of our economy who have the ready invitation of cable TV financial news? Sometimes they seem most interested in covering a potential train-wreck of a market crash rather than merely reporting that the economic train, at long last, is beginning to run with a full head of steam.
The real story is that "help is on the way" for America's struggling middle class, the unemployed and the under-employed. The much maligned TARP stimulus and "extraordinary measures" of the Federal Reserve have finally and in fact -- worked!
By Terry Connelly, Dean Emeritus, Ageno School of Business, Golden Gate University
Terry Connelly is an economic expert and dean emeritus of the Ageno School of Business at Golden Gate University in San Francisco. Terry holds a law degree from NYU School of Law and his professional history includes positions with Ernst & Young Australia, the Queensland University of Technology Graduate School of Business, New York law firm Cravath, Swaine & Moore, global chief of staff at Salomon Brothers investment banking firm and global head of investment banking at Cowen & Company. In conjunction with Golden Gate University President Dan Angel, Terry co-authored Riptide: The New Normal In Higher Education