Business Insider

Peter Crabb: A tale of two markets, one high, one low

Which is it? The best of times or the worst of times. Perhaps as Dickens wrote in his classic novel, it is both. The economic recovery is under way, but many are struggling.

The stock market is acting as if times are good. The Dow Jones Industrial Average of stock prices is up nearly 3 percent in just the last 10 days and nearly 6 percent for the year. The commodity markets are rising on strong export sales and better global economic growth projections. The Dow Jones UBS Commodity index has risen 6 percent in just the last month.

While these financial markets are indicating a better economic outlook, households are hurting.

The New York Times reported this week that consumer demand is “inert”. Consumers have little confidence in the economy, particularly the labor market, and are holding back on spending. This is a better time to pay down, or maybe even walk away from, high levels of debt.

The continuing problems of the housing market are dramatically evident in the Boise Valley. Sandra Forester reported earlier this week for the Idaho Statesman that the median home price in Canyon County fell last month to a 10-year low of about $82,000, half the value recorded in 2007.

The number of homes being sold is up, but as reported, more than 70 percent of the homes in the county are either short sales or foreclosures. This is twice the national average.

According to the most recent data from the National Association of Realtors, distressed homes (short sales and foreclosures) now account for 34 percent of all sales nationwide. The median sales price of $178,600 is 18.5 percent below prices in 2007.

With consumer and household data this bad, the financial markets must believe help is on the way. The prospective savior is the Federal Reserve.

According to minutes from its last meeting, the Federal Reserve Open Market Committee will keep interest rates near zero and is likely to restart its purchases of government or mortgage-backed bonds. This is what’s called quantitative easing.

Quantitative easing is a monetary policy placed in action when the traditional method of lowering interest rates doesn’t work. The central bank increases the amount of money in the economy by directly purchasing bonds.

The financial markets are looking favorably on this drastic action because low interest rates have done little to spur investment, particularly for small businesses.

The National Federation of Independent Business (NFIB) reported this week that its Index of Small Business Optimism rose this month, but at a sluggish 0.2 percent rate. More small firms reported increases in investment, but hiring remains weak.

Of those responding, 16 percent of small businesses plan to cut jobs over the next three months and only 8 percent expected to hire workers. It is no surprise households are holding back.

The financial markets also see little risk of inflation. The yield spread, or difference between interest rates on 2 and 10-year U.S. Treasury bonds, is holding steady at just 2 percent.

This positive inflation outlook is consistent with the plans of small businesses. The net percentage of owners raising prices is negative, according to the NFIB poll. More firms are cutting prices. The ratio is about three to two.

With little risk of inflation, the Fed justly feels it can take more dramatic actions. However, with little help coming in the form of favorable fiscal policies, the economy will stay in a rut.

It may seem like the best of times in financial markets, but it is the worst of times in the home. Peter R. Crabb is a professor of finance and economics at Northwest Nazarene University in Nampa. He earned his doctorate in international and financial economics from the University of Oregon.