Irrational Pessimism Is Finally Lifting

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Irrational Pessimism Is Finally Lifting

For the past few years, it’s been fashionable to be negative about the economy. No matter what the economic indicators say, the news has been spun to suggest the nation is headed for hard times. Whether the economic indicators go up or down, they’re used as further justification by the pessimists.

This paradox was brilliantly illustrated by our friend Brian Wesbury, chief investment strategist with Claymore Advisors, in a recent Wall Street Journal op-ed. As Wesbury puts it:

If bond yields rise, analysts fear that higher rates will discourage consumers from spending and deflate the housing market. If bond yields drop, analysts worry that an inverted yield curve could signal a recession.

Similarly, if housing prices increase, the economy is in trouble because the real estate bubble is growing. If housing prices decrease or stay flat, it means the bubble is about to break.

If foreign investors buy U.S. bonds, it means Americans aren’t saving enough. But if foreign investors do not buy U.S. bonds, it means interest rates could climb.

If wages increase, the big fear is inflation. If wages fall, the big fear is that consumers will stop spending.

Just how irrational is this national mood of pessimism? Wesbury reminds us that during the 2004 presidential campaign, 36 percent of Americans believed we were in a recession. Now, a year later, the jobless rate has dropped from 5.5 percent to 5 percent, and real GDP has grown by 3.7 percent. Yet, instead of feeling better about the economy, more Americans — 43 percent — think the country is in a recession.

Let’s compare the doom and gloom of the pessimistic forecasts to the reality. Here are eight economic factors (that seem to make many Americans anxious) and the reasons why there’s no realistic cause for worry:

First, consider the warnings that the U.S. trade deficit would shrink the value of the dollar. In the past eight months, the dollar has actually risen by 10 percent versus the euro.

Second, pundits have been claiming that the budget deficit is going to send interest rates skyward. But the 10-year Treasury yield is at 4.5 percent, which is far lower than the average yield of 6 percent in 2000, when the U.S. enjoyed a budget surplus.

Third, analysts have predicted that the drop in consumer confidence would be bad for retail sales. Consider the report on the ABC News Website2 in September, in the aftermath of Hurricane Katrina and rising gas prices...

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