I happened to be doing a little surfing of Econ blogs and found this blog post at The New Yorker Magazine by James Surowiecki. His post is virtually identical to one I posted on Friday. Even though the article was an AP story available in many locations he linked the exact same yahoo news source that I used in my post.
October 17, 2008
No, This Is Good News
Trying to explain why markets are acting in a particular way on a particular day is a classic mug’s game (although I should say that it’s a game that I myself will play in another post later today). Nonetheless, it’s good that everyone in the financial media is constantly trying to do it, because it helps clarify the assumptions that shape their view of the economy.
Take, for instance, this headline from this morning’s A.P. story on pre-market action: “Stocks open lower after data show larger-than-expected drop in new home construction.” The assumption in that headline is that a big drop in new home construction is a bad thing for the economy. And it’s true that in the short run, the drop in home construction is not great for construction companies, homebuilders, equipment manufacturers, etc. But for the economy as a whole, this drop is actually a very good thing. In fact, it’s precisely what we want.
One of the biggest problems the economy faces is the mismatch between supply and demand in the housing market, because of the lingering effect on prices of the housing bubble (prices are still too high in much of the country), and because there was massive overbuilding in much of the country. So things that get supply and demand back into sync—like steep cutbacks in the number of new homes being built—are good things. This really is a case of short-term pain leading to long-term gain. And I suspect that investors probably understand that, even if the A.P. thinks they don’t.