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The Stock Market Is Not The Economy

This is In Real Terms, a new column analyzing the week in economic news. We’re still experimenting with the format, so tell us what you think. Email me or drop a note in the comments. And thank you for all the great feedback last week!


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Last week, I mentioned the Royal Bank of Scotland’s recommendation to “sell everything.” At around noon on Wednesday, investors seemed to be taking the bank’s advice. The Dow Jones Industrial Average was down more than 500 points at one point, and although it bounced back by the close of trading, the late-session rally felt more like a garbage-time touchdown than a genuine comeback. (Markets on Thursday were the mirror image of Wednesday, rising for much of the day and then dropping toward the close.)

My usual approach to writing about the stock market is not to write about the stock market. Markets are important to investors, but despite what it might seem from this week’s banner headlines, the day-to-day moves in the Dow neither drive nor necessarily reflect developments in the economy as a whole. (Longer-run performance is a somewhat different story.)

A 500-point drop is tough to ignore, though. A while back, I laid out some rules for when ordinary people should pay attention to the stock market. The latest downturn hits pretty much all my requirements: It is sustained, is broad-based and extends far beyond the U.S. On Saturday (before this week’s gyrations, but already well into the January slump), Wall Street Journal columnist Justin Lahart wrote that this isn’t a repeat of 2008. That’s probably true, but it’s also not particularly encouraging. The 2008 financial crisis was the start of a catastrophic economic meltdown — things can be not as bad as 2008 and still be very, very bad.

Still, it’s important to keep this week’s news in perspective. One reason markets are getting so much attention right now is because this has been the “worst-ever start of the year,” as commentators (yes, including me) keep reminding us. But as reader Adam White pointed out in a comment on last week’s column, “It’s not like the market resets at the beginning of each year.” Set aside the psychological importance of the New Year and what we’re really talking about is a market that lost 9 percent in 12 trading days (as of the end of Wednesday). That’s hardly unprecedented. We had equally bad 12-day stretches in 1950, 1955, 1957, 1962, 1966, 1970, 1973, 1974, 1978, 1979, 1981, 1987, 1997, 1998, 2000, 2001, 2002, 2008, 2009, 2011 and 2015. That list includes some brutal recessions and memorable crashes, but also several incidents that proved little more than blips. Remember the great crash of September 1998? Don’t be too hard on yourself if you don’t: After plunging 11 percent in 12 days, the S&P 500 rebounded to end the year up nearly 27 percent. (For what it’s worth, the drop was attributed to a financial crisis in Russia.)

In other words, I’m not ignoring this week’s market rout, but I’m not reevaluating my whole economic outlook based on it, either.

China China China

Now China — China is real news. On Tuesday, China announced that its gross domestic product had grown 6.9 percent in 2015, which was in line with the government’s target of “about 7 percent” growth, but still represented the country’s slowest growth in a quarter-century.

The report was a bit of a Rorschach test for commentators, who mostly saw in it whatever they expected to see. To optimists, the GDP report was evidence of the country’s gradual — and ultimately healthy — “rebalancing” away from an economy dominated by manufacturing (most of it for export) and toward one with a stronger, domestically focused service sector. The report marked the first time that China’s service sector accounted for more than half its economy; accelerating growth in services such as education, finance and health care is helping to offset the slowing of the once-dominant industrial sector. Relying more than in the past on domestic demand (for both goods and services) likely won’t allow for such rapid growth, but it is ultimately more sustainable than trying to sell ever more goods to customers overseas.

Pessimists argue that China’s breakneck growth, at least in recent years, wasn’t just unsustainable — it was a mirage. They say the government propped up the boom through massive overinvestment (empty cities, pointless infrastructure projects) and debt-fueled spending, and question whether the data can be trusted at all. (Government data-fudging doesn’t have to be outright invention. China, unlike most countries, lumps together public and private spending, potentially allowing the government to cover up moribund consumer spending by increasing its own purchases.) Manufacturing numbers, which are easier to confirm through independent sources such as electricity use and export figures, are much weaker than harder-to-check services numbers — and in fact fell short of analysts’ expectations.

Everyone does agree that a slowdown in China was inevitable and that Tuesday’s report served as confirmation that it has begun. That’s bad news for the global economy, which has relied on China as its primary engine of growth since the Great Recession. If the optimists are right, China will no longer play that role, but it won’t necessarily turn into a drag on other world economies, either. If they’re wrong — well, the markets gave a disturbing preview of that scenario this week.

The .001 percent

As the rich and powerful prepared last weekend to private-jet their way to Davos, Switzerland, for the World Economic Forum, the anti-poverty charity Oxfam released the latest version of its annual report on inequality, which showed that just 62 people are as rich as half the world’s population, combined. It’s a stunning statistic — but also an incredibly misleading one.

Oxfam’s calculations are based on data collected by Credit Suisse, which found that the poorest half of the world’s population has a collective net worth of about $1.7 trillion in wealth, roughly the same amount owned by the richest 62 people on Forbes’s annual list of billionaires. Credit Suisse’s definition of wealth — assets minus debts — is reasonable in some contexts, but for this kind of global comparison, it yields some pretty funny results. For example, Credit Suisse shows that the U.S. has 10 percent of the world’s poorest people, while Malawi — the poorest country on Earth according to the World Bank — has none. The problem, as others have noted, is that Americans and residents of other rich countries not only have more money than residents of poorer countries, they also have more debt. So by this calculation a 28-year-old American doctor with $200,000 in medical school loans is “poorer” than a Kenyan living on $2 a day.

But while that “62 people” number is misleading, Oxfam’s larger point about inequality is on firmer footing. The richest 10 percent of people own 88 percent of global wealth, according to Credit Suisse’s data, and the top 1 percent control roughly half.

Number of the week

According to new data from the job-search site Indeed.com, 25.8 percent of U.S. jobs are still unfilled 60 days after being posted. That’s the highest rate of any country in the report. Indeed attributes the long lag to “mismatch,” the disconnect between the skills employers want and the ones available workers have. That may be a factor, particularly in high-demand fields such as software engineering; another factor is almost certainly the improving labor market, which means there are simply fewer workers available for hire. But that may not be all. The Wall Street Journal this week reported that employers, nervous about making a bad hire, are increasingly dragging out the hiring process, subjecting job applicants to multiple rounds of interviews, implementing screening tests and requesting business plans or other proposals.

A few years back, University of Chicago economist Steve Davis and co-authors developed a measure of “recruiting intensity,” how hard employers try to fill open jobs. Recruiting intensity fell during the recession as companies chose to leave jobs vacant or dragged their feet on hiring. It has rebounded since then but remains well below its prerecession level. In other words, if companies are having trouble finding workers, it may be because they aren’t trying very hard.

Elsewhere

A small drop in oil prices is good for the economy, but Paul Krugman says a big drop like the one we’ve seen lately could be bad.

Alana Semuels visits Juarez, Mexico, to look at labor unrest on the U.S.-Mexico border.

Investment manager Conor Sen writes about trying to stay calm through market turmoil.

GE may be moving to the big city, but Jed Kolko finds that suburbs remain the drivers of U.S. job growth.

Noah Smith says not to blame regulation for the decline in U.S. entrepreneurship.

Vauhini Vara goes long on Silicon Valley’s (still very much incomplete) effort to hire more black coders.

Ben Casselman is a senior editor and the chief economics writer for FiveThirtyEight.

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