Not Dead Yet

We had a couple of pretty scary economic developments last week, but as far as I can tell, we’re still standing.

cons_sentiment_aug_11.jpg
Source: Calculated Risk.

One very alarming indicator came from one of the lowest readings on record for the Reuters/Michigan index of consumer sentiment. Bill McBride, to whom I always turn when I’m unsure of myself (or, for that matter, better yet when I fancy myself to be in full understanding of what’s going on), attributes this primarily to heavy coverage of the debt ceiling debacle. Bill notes that sometimes these big negative swings recover when the news cycle moves on. In support of that view, he provides the following table, which may be very helpful to economic researchers studying this series.

Event Driven Declines in Consumer Sentiment
Event Date Bounce Back Impact on Consumption Other Factors
1987 Market Crash Oct-87 2 Months None None
Gulf War Aug-90 6 Months PCE declined Recession, Oil Prices Doubled
9/11 Sep-01 4 months PCE declined 3 out of 4 months Recession
Iraq Invasion Mar-03 2 Months None Oil Prices increased 10%+
Hurricane Katrina Aug-05 3 Months PCE declined 2 months Oil Prices increased 10%+
Debt Ceiling Aug-11 European Crisis, Weak Recovery

Source: Calculated Risk.

We also started out last week with stocks apparently in free fall, another indicator consistent with the view that a new recession could be about to crash down upon us, or at least consistent with the view that that many people were afraid that was happening. The subsequent violent seesaw in the market indexes was something to behold. But here we stand today, as if the whole week never happened. Perhaps it again is best seen as the market struggling to digest the implications of the U.S. credit downgrade, from which, after some dyspepsia, we may be prepared to move on.

s&p_aug_11.jpg
S&P500 stock price index. Source: Yahoo Finance.

In any case, Tuesday’s industrial production numbers were certainly positive, up 0.9% from the previous month and up 3.7% from July 2010.

ind_prod_aug_11.jpg
Source: FRED.

There’s still plenty to worry about, and deep anxiety by consumers and investors can be both an indicator of bigger problems ahead as well as a cause of a downturn in its own right. But for the time being, the real economy seems to be continuing its recent pattern of unsteady growth.

This post originally appeared at Econbrowser and is reproduced here with permission.