Bank stocks, usually a reliable economic indicator, stabilized in October as the Federal Reserve dispatched the blues with a pair of interest rate cuts and Japan belatedly came up with a serious bailout plan for its own banks.
But while markets have recovered, business conditions in the United States appear to be cooling, and some economists worry that Japan's plans could ultimately be a deflationary drag on the global economy.
The most notable new U.S. economic report was the big October drop in consumer sentiment, underlining a four-month loss in altitude from record levels.
Tellingly, the "future expectations" index tracked by the Conference Board fell heavily, probably influenced by recent layoff announcements, including banks' job cuts.
The trend bodes ill for retail sales heading into the important Christmas and yearend selling season. On a worldwide scale, it also prompts concern about excess productive capacity that could provoke the downward price and wage spiral known as deflation.
"The world desperately needs American consumers to continue doing what we do best-namely, consume," said Edward Yardeni, chief economist at Deutsche Bank Securities in New York. "If we don't, there will be even more excess capacity in the rest of the world."
He noted that the combined trade surplus of all major Asian countries, where domestic consumer demand has largely collapsed, recently hit a record $194 billion.
"There are too many goods chasing too few yuppies," he said.
Mr. Yardeni and a colleague, Ryoji Musha, Deutsche Bank Securities' chief investment strategist in Japan, think that Asian nation's banking bailout, however good in the short term, may aggravate things by preserving excess capacity with its deflationary potential.
The problem, as they see it, is that the bailout is not linked to reform.
"In effect, an undisciplined, unlimited rescue of banks using Bank of Japan funds now looks likely," said Mr. Musha. "This would enable banks to continue undisciplined, unlimited lending, propping up many unviable companies."
"We believe Japan has entered the process leading to depression," he noted glumly.
"To the extent credit is channeled to failing businesses, that is deflationary," said Sung Won Sohn, chief economist at Norwest Corp. in Minneapolis. "It is misallocation of resources, good money thrown after bad."
But he said that structural and managerial reforms that would mean cutting off credit to some borrowers has proven difficult to achieve in Japan, with its strong attachment to "crony capitalism."
In Japan and elsewhere, "the fundamental problems of excess capacity have not disappeared," he said. "There is a high degree of denial around the world; attitudes have not changed."
He said South Korea, despite its economic trauma, "has made a few cosmetic changes but no major restructuring of the banking system, the chaebols (linked industrial companies), or the labor market."
And the Norwest economist said he was concerned that "the current euphoria could prevent problem countries from taking bitter medicines."