Bipolar Economy Drives Investors Crazy

The US economy needs a mood stabilizer. One survey indicates confidence is up. The next shows optimism is down. One report boasts of improving metrics in the housing market. Another warns of continued weakness.

Trying to sort it out is like living with someone with bipolar disorder who refuses to take her medication. Can someone pass the lithium, please?

On any given day, the challenge for investors is to make sense of conflicting economic information. Jobless claims fell today, but the rate is still "inconsistent with sustainable job growth." Stocks fell, too, then edged higher in afternoon trading.

Jobs are a problem. Freddie Mac (OTC: FMCC) estimates the economy needs to generate more than 250,000 new jobs a month, on a sustained basis, to reabsorb all the jobs lost since the recession. Good luck with that: It's just not happening. In a forecast released today, Freddie predicts growth in the second half of 2011 but expects unemployment to remain more than 8% through year's end.

No wonder the economy is having collective mood swings. People remain anxious and uneasy, burdened by debt and uncertain about the future. As one woman remarked to another in a New York City elevator yesterday, "Any day is a good day, as long as you're employed."

Too many people are still having bad days. And even those who are having good days -- because they have jobs -- are edgy. The focus has shifted from success to survival, from making a profit to making monthly payments. The economy seems skittish and unpredictable. It rallies, then it falls. It takes one step forward, two steps back.

Last year, David Shulman, Senior Economist at the UCLA Anderson Forecast, said the nation had a "bipolar economy." Upping the mental ante, he blamed Washington's economic stimulus packages for creating "economic schizophrenia" by creating growth in GDP without growth in employment.

Is it getting better? A little, Shulman told Investor Uprising today. "The economy now appears to be gradually on the mend and, to continue the medical analogy, it is healing slowly." But it's going to take time for full recovery.

Business sentiment improves, only to tumble. Consumers show a sign of optimism, then retreat. Consumer confidence fell to a six-week low as the costliest gasoline in almost three years worsened Americans' perceptions of their finances, according to the Bloomberg Consumer Comfort Index released today. Two weeks ago, the Reuter's/University of Michigan's consumer sentiment index showed consumer sentiment was improving. But that was before the National Federation of Independent Business said small business optimism was down for the second consecutive month.

Just yesterday, researchers at the UCLA Anderson School of Management and Ceridian Corp. released their monthly trucking index, which measures shipments of products across the country. The index, like every other economic indicator these days, was ambiguous: "See-saw economic performance persists. GDP outlook good, not great."

Retail sales climbed in April... but wholesale costs climbed faster and more sharply. Odds are manufacturers will start passing more of those higher costs along to their customers, potentially negating those illusions consumers had about getting ahead, or, more realistically, getting back on their feet.

Mortgage applications are up, and so are the numbers of pending home sales. But there's no agreement whether prices are rising or falling. The National Association of Realtors reports the sale prices of existing homes rose in more than 20% of metropolitan statistical areas nationwide in the first quarter. However, Zillow reports home values fell 3% in the first quarter and 1.1% in March, a drop of 29.5% from the peak of the market in June 2006.

Home prices also fell on both the CoreLogic (NYSE: CLGX) and Integrated Asset Services indices in March, as well as on the S&P/Case-Shiller home price index and Clear Capital's measurements. Paul Sveen, CEO of Integrated Asset Services, may have summed up the sentiment most succinctly when he released his firm's quarterly index. "There's just nothing good to see in this report," he said.

Not now, anyway. The economy is still generally depressed. And as Daniel Jeffreys, a London-based writer and librarian, put it so floridly in an essay he penned two years ago:

The market is bipolar. Wild-eyed entrepreneurs and innovators, crazy as any laudanum quaffing poet, are in the business of selling visions. Elsewhere venture capitalists running down a juicy, dripping deal are like hormonally challenged teenagers... Now the economy has turned sour. The once manic basic unit is tucked under the duvet with the blinds down, sleeping all day, bewildered, apparently lacking in desires.

But there's one thing good thing about mood swings. Eventually, they swing the other way. You just have to be patient.