U.S. economy remains fragile despite Wall Street reaching new heights


The State Column, David Keup | June 15, 2014

U.S. economy remains fragile despite Wall Street reaching new heights

Low interest rates and no real big changes in the economy are early indicators of a downturn.


As the stock market continues to boom, financial experts and economists in the U.S. are grappling with dual realities.  Philly.com reported on June 14 that experts on the economy are saying that the U.S. economy seems fragile, and the labor participation rate is lousy.

“When companies are doing well, stock prices do well, so the economy must steam full ahead,” says Esme Faerber, professor of business at Rosemont College. “But it often doesn’t work that way.”

Experts say that these conflicting realities are confusing. Financial assts are reaching new heights, prompting some market-watchers to wonder whether another crash lurks around the corner. But, stocks buyers are complacent. The so-called fear gauge, the CBOE Volatility Index, is nearing its historic low of 9.89 in January 2007 – just before the world economy and the markets plummeted and launched the Great Recession.

So what to make of these incongruities? The economy is at an inflection point, experts say. “We sometimes see this sort of paradox between economic conditions and the financial markets. The reason is, the stock market reflects sentiment right now, as well as economic fundamentals in the future,” says Joe Davis, global chief economist at Vanguard in Conshohocken.

According to the data service Capital IQ, the biggest buyers of stocks in the first quarter 2014 were the companies of the S&P 500 itself, which cumulatively repurchased $160 billion of their own shares. The S&P 500 has risen 5.4 percent year to date and 22 percent in the last 12 months. However, experts say that as corporate America buys back its own shares and bolsters the markets, they are failing to invest in new business and equipment that could propel the economy.

On the other side of the equation, by keeping interest rates low, the U.S. Federal Reserve is doing everything it can to prevent a feared economic downturn, but at the same time, the central bank recognizes that some financial assets may be overheating.

 

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