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Stock Market and the Economic Outlook

Prof. Peter Morici - 9/24/2006

On Thursday, the Philadelphia Federal Reserve Bank bank reported a negative index for September manufacturing activity in the Pennsylvania, New Jersey and Delware region, and the stock market slid. That reaction has continued today.

Along with concerns about the housing market, investors may be overracting to that news

Reports on the ground indicate capial equipment sales are strong, and commercial construction and public works are revving up. The outlook for both producer durables and nonresidental construction are very strong.

The housing market may be slowing but disposable income keeps growing, month after month. The additional income people don't spend on housing has to go into either increased retail sales or more savings. With gas prices falling, even more disposable income is available and consumer confidence will buoy. Hence, I would bet on more retail sales than savings, and a stronger holiday season than retail chains expected. The only real question is whether retailers have stocked enough to meet demand.

Third quarter data may disappoint, because the direction of gasoline prices did not become evident until just before Labor Day. The fourth quarter should prove a winner. The economy will bounce sooner than many forecasters anticipate.