Half-Empty or Half-Full?

Half-Empty or Half-Full?

Following a week chocked full of stories about soaring food prices, $120 oil, sliding housing prices and a blowback against ethanol, we need to step back, take a deep breath and canvas the economic landscape for any signs of improvement. The economy is certainly not at peak performance right now. However, even in the worst of times, positive signs surely exist and this time is no different. One of the more unheralded good news items in recent days is the emerging stability in global credit markets. Credit market spreads have narrowed against government bonds and high-yield (AKA junk) bonds have rallied, due in part to the Fed's move to open up discount-window lending to brokers. While these developments don't necessarily mean bumps will not come along in the near term, gains in the high-yield bond market are typically the first step in a broader recovery.

Another sign that underlying trends, and more importantly the U.S. dollar, might be improving has been gold's sharp downward move in price. Investors had been plowing money into the precious metal not only as a hedge against inflation, but also as a bet against the dollar and a source of quick returns given the logjam in credit markets. Indeed, since peaking in mid-March above $1,000 per ounce, front-month gold contracts are fetching about $850 at present and could move lower if the dollar's recent gains hold up. In that case, you may want to log on here and let go of some old jewelry or even sell that class ring that doesn't quite fit on your finger anymore.

A few macro data releases also suggest things may not be as bad as first expected. This morning's release on April payrolls showed that employment declined (for the fourth consecutive month, in fact), but the overall magnitude of net job cuts was well below expectations and some key services industries are adding new jobs. In fact, some analysts (subscription required) have pointed out that job losses at this current point in the business cycle are quite small and foreshadow only a minimal decline in payrolls going forward, assuming history serves as a suitable guide.

The fact that the unemployment rate dipped this past month to 5 percent and unemployment insurance claims haven't spiked to the 400,000+ levels seen in prior downturns, the labor market is not as bad as some characterize it. Rounding it all out, today's factory orders report was unexpectedly strong and the details show underlying demand for manufactured goods not related to autos and housing is holding steady, if not increasing.

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