Wednesday, May 05, 2010

Mixed Economic Data For April

The economic data for April was a mixed bag.

Though gross domestic product expanded at a 3.2 percent pace in the first quarter (according to the Commerce Department's first estimate), that was below the 3.4 percent rate economists polled by Thomson Reuters had forecast. And it was significantly less than the 5.6 percent growth in the fourth quarter of 2009.

The GDP increase was fueled in part by an increase in consumer spending. The Commerce Department said retail sales rose 1.6 percent in March, the largest increase in months, following slight gains in January and February.

And consumer confidence rose in April to the highest level since the financial industry meltdown a year and a half ago.

The Conference Board said the Consumer Confidence Index rose to 57.9 in April, up from 52.3 in March. The Consumer Confidence Survey is based on a representative sample of 5,000 U.S. households. The Index is now at its highest reading since September 2008 when it stood at 61.4. Economists surveyed by Thomson Reuters were expecting a reading of 53.5.

However, April's reading is still far from what's considered healthy. A reading above 90 indicates the economy is on solid footing; above 100 signals strong growth.

The index has been fitfully recovering from its all-time low of 25.3 in February 2009.

A contrary report from Reuters and the University of Michigan showed that consumer sentiment declined to 72.2 in April, from March's 73.6. Yet, that was still better than the reading of 71 that economists had forecast.

There is reason to be concerned about the prospects for continued consumer spending, which accounts for 70% of all US economic activity; revolving debt, which is almost entirely credit card debt, fell to $858.1 billion in February. That's a far cry from the high of $975.7 billion in September of 2008.

Tapped out consumers are focusing on relieving themselves of debt, not incurring more of it.

While the GDP was up for the third straight quarter, it was down from the fourth quarter's 5.6 percent, a rate that was inflated by government stimulus spending and companies restocking their depleted inventories.

For the economy to show healthy growth, it would have to grow at a faster pace than it did the first three months of the year. Growth would need to equal 5 percent for all of 2010 just to lower the average jobless rate for the year by 1 percentage point.

The hard reality is that US companies need to add at least 250,000 jobs monthly in order to reduce the unemployment rate from its current 9.7 percent.

Absent government stimulus and intervention, the economy will be quite challenged to grow at 5 percent, or anything close to it.

Nationally, one in four homeowners owes more on their mortgage than the current value of the house. And, according to Gallup, the underemployment rate has increased to 20%. That includes the unemployed, plus part-time workers who want full-time work.

Those realities should put a downward pressure on consumer spending, and ultimately GDP growth as well. It should remind us that this recession is not over.

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