The latest purchasing managers indexes tracking the US economy are out, and they are good, really good. Yet stock markets tumble. What is going on?

Last year, stock markets hit new record highs with such gay abandon that it became tedious. The last few days have been far from that.

Yesterday (February 5th) the Dow Jones saw its largest intraday loss ever (that means the biggest fall between day high and day low). We need to put this in perspective. It was the biggest loss in terms in absolute value, the percentage fall was high, but no record. It is simple maths, if you start with a big number, you need a big number to see a significant percentage change. The Dow Jones did in begin yesterday at 25,337, and finished it at 24,343. That’s a massive drop of 994 points, but a percentage fall of 4 per cent. A four per cent fall is big, but hardly a record.

The Dow has lost 2,273 points since the 26th January, the last time it closed at a record high, falling by 8.5 per cent.

You would have to rewind the clock back all the way to the early days of last December to find the last time the index was so low. Err stop. Not sure about you, but the early days of December does not feel like that long ago.

In fact, the Dow Jones is some 4,200 points up on the year-ago price, that’s around 21 per cent, and some 6,460 points or 36 per cent, up on its level the day before President Trump was elected.

Then again, over the last five years, the index is up by around 74 per cent – so the stock market rally is not just a Trump thing, it occurred under Obama, too.

See the recent falls in the above context, and they don’t seem so drastic, when stock markets boom, which they have been doing for some time now, the odd big fall is inevitable, but is soon corrected. See it in terms to taking a breather down the gym, before hitting the weights.

But there is one curiosity. The latest purchasing managers indexes (PMIs) tracking the US economy were really good – the non-manufacturing US PMI rose to its highest level since 2005, for example, and together with the manufacturing PMI point to annualized growth of four per cent.

But markets are fretting that the economy is in danger of over-heating. With US unemployment at 4.1 per cent, the only way it can carry on growing at this kind of pace for much longer is if we see a sharp rise in US productivity.

And maybe the Trump tax cuts will have this effect. Maybe, US business, will, in any case, react to the booming economy, but lack of slack in the labour market, by investing more, automating, and start fulfilling the potential of what has become known as the fourth industrial revolution

But the nagging doubt won’t go away. The Trump tax cuts amount to a $1.5 trillion fiscal stimulus at a time of near full employment. Economic theory says these are the conditions for rising inflation and interest rates.

The global economy may need moderately higher rates, but with private sector debt levels so high, and with asset prices to earnings so high – if rates are forced to increase to the kind of level that we once called normal, say four per cent, then there is a big question mark over whether the global economy can afford them.