Can one day’s fall mean the market is getting bearish on the US economy?

Brad Setser says that “I thought Leonhardt was better than usual” today — and he’s right. David Leonhardt’s Economix column comes on a Wednesday, which is perfect timing to look at the economic fundamentals, insofar as there are any, behind the stock-market fall on Tuesday.

Wall Street was caught off guard when the Commerce Department reported yesterday morning that orders for durable goods — big items like home computers and factory machines — plunged almost 8 percent last month…

Is the entire United States economy in danger of going the way of the manufacturing sector? Is it possible that we’re headed for a real recession?

For months now, the economy seemed to shrug off the forces weighing on it and just kept on growing. But those forces never went away. If anything, a number of them have gotten stronger. And that’s the most worrisome part of the bad news from the nation’s factories: it fits into a larger story…

the manufacturing downturn stems from a couple of larger economic problems. One, of course, is the housing slump, which has caused a big drop in new construction and much less demand for doors, windows, countertops and a lot of other things that kept factories busy in recent years…

The second big problem for manufacturers is the series of interest rate increases that the Federal Reserve has imposed since 2004.

The economic news certainly isn’t all bad. The housing problems still haven’t turned into a crisis, thanks in part to interest rates that are still not high by historical standards. So the most likely situation is not a full-blown recession (often defined as two consecutive quarters of a shrinking economy)…

But for all the attention that formal recessions get on Wall Street, they are not really the benchmark that matters to most people. A significant slowdown that falls short of a recession can do a lot of damage to stock prices, profits and wages.

I do have a couple of issues with this. One is the emphasis on recession, when even Leonhardt ends up hedging his bets and deciding that we’ll probably just end up with “a significant slowdown”, whatever that might be. For what it’s worth, it looks as though Nouriel is back onto his recession call: “These bad economic news from the US suggest that the US will enter into a recession this year – as I predicted last summer – as early as Q1 or Q2.” (He neglects to mention that only a few weeks ago he was talking about only a “growth recession“.) I’m sticking to my belief that if the market and an economist say two different things, you should go with the market every time. And on Tuesday the Intrade recession contract did rise — all the way to 22.

But more to the point, you can’t just say that “the economy seemed to shrug off the forces weighing on it and just kept on growing,” as though it’s some kind of pubescent boy. Economic growth is what happens when the positive forces outweigh the negative forces in an economy. And although there are always negative forces, the positive forces have been very strong — something which a lot of economists have been very wrong about. If the economy were as dependent on home building and manufacturing as many people seem to think, we’d be in a full-blown recession already.

I also think that the connection between the strength of the economy and the strength of the stock market is probably weaker now than it’s ever been, given the amount of high-tech financial engineering which increasingly underlies both corporate capital structures and stock trades. Obviously, when stock markets around the world fall, the pundits will immediately look to find reasons why the US or global economy might be faltering. You can’t blame Leonhardt for that. But it might also be worth asking what has kept the US economy growing for so long, whether those forces are now weakening, and if so, why now.