Wednesday, May 12, 2010

Our Week In Review

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OVERVIEW ~ April 26 through April 30, 2010 ~ The stock and bond indices worked hard to hold their own with several powerful forces buffeting them all week. The stock and credit markets, lacking a strong sense of direction, moved up and down with each day’s predominant economic news story.

FOCUS ~ Perhaps most telling regarding the certainty about where the economy is headed was the weak reaction in the markets to Friday’s announcement that the Gross Domestic Product (GDP) had grown by 3.2% in the first quarter of this year. Let’s look deeper.

The good news in the GDP data was that consumer spending was up markedly, growing at a 3.6% rate, and spending by businesses was up, while inflation remained very low. (All of these aspects of economic growth are considered and included in the GDP, all of which has an effect on the mood of investors.)

Though inventory rebuilding was down relative to the prior quarter in the GDP report, as expected, it still made up half of the most recent quarter’s 3.2% economic growth. In the last quarter of 2009, the effect of inventory building was one of the largest factors driving the overall GDP growth rate higher (to a strong 5.6%). Inventory rebuilding is an inevitable component of an economic recovery as businesses prepare for more sales. Analysts expected this quarter’s inventory growth rate to decline, since so much inventory rebuilding had already been accomplished in the prior quarter. But inventory rebuilding remained a surprisingly important factor in the most recent GDP report.

This is not bad, but may not be sustainable. Surely, it will be a far smaller factor in second quarter growth, which leaves us uncertain about the amount of growth our economy may be able to muster from April through June of this year with less growth from inventory rebuilding. The GDP report, in other words, really doesn’t supply the clues needed to forecast short-term economic growth (or, should it occur, contraction).

This uncertainty increases the markets’ vulnerability each day as investors seek a trend or a trend-making force and settle on one issue or news story one day, and another on the next day. A strong, sustained real estate (and overall economic) recovery will depend on more certainty and confidence regarding employment growth and consumption, among other indications of recovery. Without that, the markets may remain very volatile, lacking clear direction so long as growth in the near-term future remains so uncertain.
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