Sunday, May 23, 2010

Leading economic indicators dropped in April

Leading economic indicators dropped in April for first month in more than a year.

"Six of the index’s 10 components deteriorated in April. The biggest drags on the index: U.S. residents filed fewer applications to build homes, the unemployed filed more claims for jobless aid and consumers’ confidence dropped. A measure of how fast factories got goods signaled their suppliers were not as busy.

Four components improved, including higher stock prices, on average; a sharper difference between overnight and 10-year borrowing costs, historically a positive signal; more hours worked in factories and an increase in manufacturers’ orders for capital goods."

Higher stock prices, however, are not very helpful for sustaining a recovery. Indeed, higher stock prices in the face of rising joblessness and slowing construction are signs that sentiment is irrationally exuberant in the face of mediocre fundamentals --- and that asset values are inflated by excess liquidity rather than actual utilization of productive capacity.

At the end of April, stock prices were near their peak. Broad indexes have fallen about 10% since then, putting in a LOWER HIGH on a post-plunge rebound, then putting in a LOWER LOW on a second dip downward. Next month's reading on stock prices is likely to be less bullish.

Another supposedly bullish indicator is rising 10-year bond yield spreads. But this indicates that the economy is expected to rebound within a broad timeframe of the next 10 years. Not much comfort for those expecting economic turnaround to come sooner.

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