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U.S. Economy Right Where It’s Supposed to Be, Ritholtz Says

Aaron Task
Editor in Chief
Daily Ticker

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For the third consecutive week, jobless claims were higher than expected and above 380,000, another sign the economy's first-quarter momentum is waning.

The four-week moving average for jobless claims is now 382,000, the highest since early January.

The trend bodes poorly for next Friday's April employment report and other recent data points, such as Wednesday's grim durable goods data, have many economists fearing a repeat of the spring of 2010 and 2011, when economic activity came to an abrupt halt.

But the economy is "doing pretty much exactly what [it] should be doing," says Barry Ritholtz, CEO of Fusion IQ and author of The Big Picture blog. "This is what you should expect following the sort of stock market, real estate, credit collapse we saw."

Citing the work of economists Carmen Reinhart and Ken Rogoff, Ritholtz says this kind of "meander along, bumble along...just on the verge of stall speed" type economy should last 7 to 10 years. With 2008 as the starting point, that means another 3 to 5 years of disappointing, desultory growth.

"It's maybe the fifth or sixth inning" of the cycle, he says. "We're closer to the end than the beginning but it's not like 'ok in the fall this is over'. This is going to go on...as consumers continue to deleverage."

Many pundits and prognosticators have looked at the same data, read Reinhart and Rogoff's book and reached a very grim conclusion about the implications for investors. As the economy continues to disappoint, the market is destined to crash, they say.

Ritholtz, conversely, has been largely bullish since the bottom in 2009 -- as documented here -- and continues to believe "you have to give the market the benefit of the doubt."

While the market has stalled after a stellar run from mid-October to March, Ritholtz says the odds heavily favor that's a sign of consolidation versus a market top for three main reasons:

  • The Fed is still at zero and stands ready to do more if the economy hits a real rough patch, as Ben Bernanke reasserted yesterday.
  • The debt crisis in Europe, while a huge threat to the global economy, seems to be "temporarily under control."
  • Average gas prices have fallen to $3.83, according to AAA, after approaching $4 earlier this year. Ritholtz predicts they will likely fall another 10% in the coming months and calls that forecast "conservative."

In addition, under-invested money managers suffering from "performance anxiety" will be looking to put money to work if and when the market falls further, a phenomena Ritholtz details on his blog.

We've had a less-than 5% correction and people are screaming like it's the end of the world," he quips. "A little backing and filling is what's supposed to happen in a healthy market - you get a shallow pullback, attract new buyers, work off some excess and get ready for the next leg."

Aaron Task is the host of The Daily Ticker. You can follow him on Twitter at @aarontask or email him at altask@yahoo.com