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Economy's optimists finding it harder to hang on

August 19, 2010 | 11:31 am

It’s mid-August, so there aren’t all that many people around on Wall Street to react to economic reports. But those who did show up for work on Thursday can’t like what they see.

Stocks are slumping and investors again are heading for the relative safety of bonds after the latest economic data came in mostly worse than expected.

The Dow industrials were off 160 points, or 1.5%, to 10,255 at about 11:30 a.m. PDT. Economy-sensitive stocks were leading the decline: The Dow transportation stock index was down 2.7%.

The 10-year Treasury note yield is back to a 16-month low of 2.57% from 2.64% on Wednesday.

The government's report showing a jump in new claims for unemployment benefits to a nine-month high of 500,000 was another heavy blow to confidence in the recovery.

So was the Federal Reserve Bank of Philadelphia’s report on August manufacturing activity in the mid-Atlantic region: For the first time since July 2009, the Philly Fed’s manufacturing index was negative.

The steep drop in the Philly index over the last three months “reflects the fact that businesses are reining in capital outlays and delaying hiring as the economic outlook has become less certain,” said Ellen Beeson Zentner, an economist at Bank of Tokyo-Mitsubishi in New York. “This is a troubling development for the U.S. economy because at this point, the economic recovery is too weak to withstand withdrawal of support from the manufacturing sector.”

Right -- until recently the economy has had manufacturing strength going for it, helping to offset decelerating consumer spending.

A third report, the index of leading economic indicators for July, was up a minuscule 0.1%, at least staying in positive territory. But the June index change was revised to a drop of 0.3% from a decline of 0.2%. June’s loss was the first since March 2009, when the recovery was just beginning.

For consumers, though, the news isn't all bad: The disappointing economic data have pushed oil to a new six-week low, down $1.63 to $74.19 a barrel. Crude's price has dropped 10% since Aug. 3.

Robert Brusca, who heads Fact and Opinion Economics, says optimists are finding it increasingly difficult to hold out hope that the economy will shake off its recent weakness and turn higher.

“Optimism has died and there is a reason. Things are not getting better at even the same rate. Those seeing the economy as getting better are in a distinct and shrinking minority,” Brusca said. “Brace yourself.”

-- Tom Petruno