That Old Economy feeling

A funny little application on the Internet lets you roll your cursor arrow over a graph; as you do that, four caricature figures, meant to be economists, follow your every move.

The point of the joke is the obsession economists are thought to have with short-term trends. Watch! You can make them follow every arbitrary change in a metric, and they don’t even know you’re just playing with them!

Certainly a few real economists, not to mention the do-it-yourself economists you find in business and investment circles, were craning their necks over the last couple of weeks as they watched some major economic numbers run up the chart. The biggest news was the 7.2% annualized growth in the United States’ real domestic product, which disposed of the Democratic Party’s hope that it could attack the Republican administration over the economy. Canadian real domestic product growth in the same quarter was much weaker, largely because of a 0.7% month-on-month decline in August, the result of the Ontario power blackout.

The release of strong economic growth figures in the United States was a tonic for the equity markets, which had developed the habit of expecting surprises to be unpleasant.

More sober market-watchers warned that equities might be getting seriously overvalued once more. Certainly we can see price-to-earnings ratios rising, in the anticipation of higher earnings or capital gains; that promise has not always come true. But with very low interest rates, and (in absolute terms, at least) a shallow yield curve, relatively high price-to-earnings ratios are less unstable than during the last bull market.

What is noticeable about the rally in the markets is that it is being driven by a lot of Old Economy industries, including commodity producers. Mining — and not only gold mining — has been among the better-performing market sectors. Metal consumers, also, are seeing better times in their businesses.

That the market is being led by the old and grey industries argues that the technology bubble won’t be reflating soon. That can only be good for the capital markets and the economy in general.