Sunday, December 19, 2010

Good news? Not so fast, Sparky

The most recent batch of economic data has been quite positive. On Thursday alone, three different reports showed that initial jobless claims had fallen, housing starts and the issuance of building permits had both risen and a Federal Reserve index of manufacturing activity rose too.

But David Leonhardt writes in the Economix blog:
Before getting too excited about these trends, let’s think back to the early part of this year. Back then, initial jobless claims were falling. Housing starts and the issuance of building permits were rising. A Federal Reserve index of manufacturing activity was rising too. And then what happened? The recovery stopped. 
Yes, the latest data has been good. But the economy remains both weak and vulnerable. The notion that a couple of weeks of decent news should cause the Fed to proclaim victory and halt its campaign to lift growth — a notion you’re starting to hear — seems misplaced.
The recovery remains nascent and vulnerable, he writes.
Any number of factors — Ireland, Spain, a post-holiday consumer pullback in the United States — could cause problems. Given all this, the Fed would seem to be taking a bigger risk by ending QE2 than by continuing. 
Put it this way: When the last monthly jobs report showed a gain of only 39,000 jobs, far less than needed to keep up with population growth, economic weakness still appears to be the main reason for concern.

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