The Dow Jones Industrial Average has finally clawed its way back to the 10,000 point mark, a level that has not been seen since long before the current financial crisis. So with the benchmark index reaching new heights does this mean we’re finally out of the woods and can breathe easy once again? Or is this a false spike that will only lead to another downturn?
Leading economists and analysts are mixed in their outlook, but there is plenty of evidence to suggest continuing storm clouds up ahead. While the stock market may be celebrating, the larger economy still has a long way to go.
Here’s a few things to look out for:
- Unemployment is still worsening. When the national unemployment rate goes above 10% (which is already has in many states) will this further contract consumer spending? In the U.S. consumer spending still acount for 70% of GDP. In the U.K. that figure is only 65% of GDP, so perhaps we still have a ways to go down.
- The specter of inflation. The U.S. has $50 trillion (yes, trillion) in unfunded liabilities. Many analysts fear this will lead to significant inflation in the next three years.
- What about innovation? The credit crunch has most impacted small businesses and entrepreneurs, the seat of innovation in the U.S. The number of patents files has been declining, not a good sign for America’s future innovation.
So if the stock market rally isn’t indicative of the weakness in the broader economy, what’s causing it? Many argue that we’re simply seeing the effect of massive government spending. When that spending stops will the economy be able to pick up the slack?