Stock volatility overshadows economic recovery

WASHINGTON — You wouldn't know it from watching the stock market, but the U.S. economic recovery has gathered steam, with gains in employment, consumer confidence and a host of other indicators. The return of volatility in financial markets, however, threatens these gains.

There are numerous positive signals, not the least of which includes a return to hiring in most states and economic growth for three consecutive quarters.

The National Association for Business Economics, in an outlook released Monday, revised upward its prediction for economic growth and business activity. The group of 46 forecasters now expects the U.S. economy to grow 3.2 percent this year, driven by pent-up demand for goods and services, improved consumer sentiment, job growth and business investment.

"Although risks involving Europe have recently escalated, the outlook in this country has improved in most respects. Growth prospects are stronger, unemployment and inflation are lower, and worries ... have diminished," the NABE Outlook survey said.

Troubling signs remain, however, ranging from doubts about the strength of a housing-market recovery to huge state and federal deficits that could spook investors.

Stock prices historically reflect sentiment about economic conditions six months or so into the future. From that perspective, the large run-up in stock prices last year and most of 2010 so far reflected an economy on the mend.

Now, stocks seem to be pointing to a slowing recovery later this year as federal stimulus money phases out and problems abroad plus a strengthening dollar hurt U.S. exports, one of the few consistent bright spots over the past few years.

"Stock prices incorporated the turnaround, but now you are incorporating a slower track, and the economic data are confirming what was in market prices for a while," said Vincent Reinhart, a researcher at the American Enterprise Institute, a free-market policy-research organization.

Share This Story