For those who closely follow financial markets, the first two weeks of 2016 have been the most fun since the financial crisis triggered by the collapse of the housing bubble. The market has lost more than 10 percent of its value since its late December peak, destroying more than $2 trillion of stock wealth.
Markets elsewhere in the world have experienced comparable declines. Slowing economic growth has sent oil prices plummeting to less than $30 a barrel, pushing many oil companies to the edge of bankruptcy and devastating the economies of countries that are heavily dependent on oil exports. All this may sound very grim, but unless you were borrowing to buy large amounts of stock or oil futures, there is no reason to look for a ledge from which to jump.
As Herbert Hoover famously said, “The fundamentals of the economy are strong.” Okay, that’s not serious.
The fundamentals are not strong, but the economy is also not about to fall into another recession. The basic story is the one we were seeing before all the “fun” on Wall Street. We are looking at an economy that is growing slowly and still has not come close to recovering from the last recession. The roller coaster ride on Wall Street has little effect on this picture.
Later this month, we will get data on GDP for the fourth quarter, which is likely to show the economy growing at less than a 1 percent annual rate. That will make the growth for the year less than 2.0 percent, a dismal performance by almost any measure, but it is especially bad for an economy that has not recovered the ground lost in the downturn. The economy is almost 7 percent smaller than the post-recession projections for 2016 from the Congressional Budget Office (CBO) and other forecasters. To make up this gap, the economy should be growing 3-4 percent annually for several years.