Dow as icon defies belief as economy limps along

October 08, 2006|By Jay Hancock | Jay Hancock,Sun Columnist

USA Today informs us that the Dow Jones industrial average is "a Wall Street icon," and the Random House Unabridged Dictionary says that an icon is a representation of something sacred that is "venerated itself as sacred."

Don't feel bad if you don't share the veneration.

The Dow reached a new high last week, but "high" is a relative term that barely applies to the Dow and not at all to other parts of the economy. If you see investment bankers genuflecting and feel left out, look around. There's plenty of company.

The Dow took 5.8 years to go from 11,722 to 11,867, which represents an average annual return of 0.2 percent. (OK, Dow stocks pay dividends, which aren't part of the index. Count dividends and the Dow generated an average annual return of 3 percent. For that rate you could have bought a bank CD.)

Cut the Dow open and it gets uglier.

More than half the Dow's 30 stocks are still below their level in January 2000, when the index marked its previous zenith. Most of the companies added in 2004 and 1999, when the Dow Jones people decided the index needed more silicon and fewer smokestacks, are way underwater.

Even so, compared with other parts of the economy, the Dow looks like a winner.

The Standard & Poor's index of 500 big-company stocks is still about a tenth below its 2000 high. The Nasdaq index and its famous technology stocks are down by about half. Even the Wilshire 5000 - the whole caboodle of the U.S. stock market, including many smaller companies uninflated by the 1990s bubble - has not reattained its former heights.

These indexes represent U.S. corporations whose profits, as a percentage of the economy, are larger than at any time since the 1960s. If that hasn't propelled the indexes well past their 2000 highs already, what should we conclude about the larger commercial picture?

During the 1991-2001 economic expansion, the nation produced an average of 2.4 million jobs each year. In the current expansion, the country has added fewer than 1 million jobs a year, far less than the growth in the labor force.

The stated unemployment rate is 4.6 percent, but it's so low only because millions of people who are unemployed by any definition except the government's aren't counted as unemployed.

There are 1.6 million people who say they want a job but have given up trying to find one. Officially, according to the Labor Department, they aren't unemployed. There are millions more collecting federal disability benefits who some economists believe should also be marked down as unemployed. And there are 4 million people who work part time but say they want to work full time.

Even if they could get full-time jobs, they might find the pay isn't so terrific.

Hourly compensation increases were only 1.7 percent in 2003, 0.9 percent in 2004 and 1 percent last year, after adjusting for inflation, according to the Labor Department. Pay shows signs of perking up this year, but it's misleadingly puffed up by the soaring cost of health insurance benefits, which count as compensation but don't put cash in workers' pockets.

And any "hourly" pay estimates are probably too high because the government almost certainly underestimates how many hours most of us work.

All this is part of an economy that appears to be not accelerating, which might mend some of the ills, but slowing. Friday's mediocre job report reinforces this idea.

It's too early to say whether recent high energy prices, rising short-term interest rates and the cooling housing market will push the country into recession, although that's probably a long shot. But there is little doubt that economic activity has diminished since the beginning of the year.

By rising, the stock market is reacting to signs that the Federal Reserve has stopped increasing rates, which, if true, means that the future returns of lent money will pose less competition for those of stocks. But corporate results ultimately depend on prosperous laborers and solid fundamentals.

If those don't show signs of arriving soon, the Dow may end up faking out even itself. For many of the rest of us, it already looks like a false idol.

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