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Despite strong GDP, another down day

Steve Henn Jul 27, 2007

Despite strong GDP, another down day

Steve Henn Jul 27, 2007


Kai Ryssdal: Nothing macro-economic changed between 4 yesterday afternoon in New York and 8:30 this morning in Washington. But the two numbers that were posted at those hours, they give you some pause — 311 points down on the Dow yesterday, gross domestic product up almost 3.5 percent this morning. Yes, the GDP number is what’s called a lagging economic indicator. That is, it tells you what’s already happened. But still somehow you’d have thought it would drive investors up today instead of down. Instead, the Dow gave up another 200 points.

Marketplace’s Steve Henn explains — or at least tries to.

Steve Henn: OK, first let’s start with the good news.

Peter Morcici: The economy is recovering.

Peter Morcici is a professor of economics at the University of Maryland. He says in the first three months of 2007 the U.S. economy was a hair’s breadth away from recession. But this spring it turned around.

Morcici: In the second quarter business investment bounced back. A cheaper dollar against the Euro helped exports, and government spending picked up a bit. Overall, it was a very positive report.

Consumer spending was down a bit, easing inflation worries at the Fed. So what are the markets so worried about?

Morici: I think the stock market is overly focused on the subprime crisis.

Many of the banks, brokerages and institutional investors that bought big blocks of risky adjustable rate mortgages have been burned.

Hugh Johnson: You can just imagine what they are saying to themselves now. Let’s not do that again.

Hugh Johnson, chief economist at Johnson Illington Advisors, says that means all kinds of debt-financed deals, like the proposed buyout of Chrysler by Cerberus, are suddenly receiving a lot more scrutiny than they were just a few months ago.

Johnson says it was those kinds of buyouts that helped fuel the huge gains on Wall Street this year. Now the future of many of those deals seems uncertain.

Johnson: Well, yeah. The riskier loans. The riskier buyouts, the more-leveraged riskier buyouts, aren’t gonna get done. And, you know, that’s healthy.

But it also seems to have cut the legs out from under the run-up in stock prices — at least for now.

In Washington, I’m Steve Henn for Marketplace.

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