GDP
A quicker pace
To hear some economists tell it, the recovery is advancing so quickly that the economy will hit full stride within weeks, and no later than midyear.
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The story, however, has its doubters, who note that vast areas of the economy continue to struggle.
Manufacturing is barely off the canvas, the travel industry is hobbled by slim bookings and such specialties as advertising are still weak. Joblessness remains stubbornly high.
Meanwhile, states are coping with shriveled tax revenues while corporations grasp at every dollar in a too-often elusive search for profits.
That brings us to Friday’s report on first-quarter gross domestic product. Chicago economist Brian Wesbury expects it to show growth advancing at a 4 percent annual rate, well ahead of the 1.7 percent rate three months earlier.
“The recovery is here, and the economy is back,” said Wesbury, of Griffin, Kubik, Stephens & Thompson, an investment firm. “We will see this 4 percent growth rate for the full year.”
He said there is a bittersweet element to the recovery because so much of the recent statistical improvement stems from businesses selling off inventory. Near the end of last year, such unloading of goods hit a record pace.
“But now we are seeing huge gains in productivity as businesses step up spending as well as their level of manufacturing,” Wesbury said.
“Companies also have finished writing off whatever they could, so profits will improve dramatically by the fourth quarter–as much as 20 to 30 percent from a year earlier.”
INTEREST RATES
No uptick yet
While various experts continue to declare the economic glass half full, Fed Chairman Alan Greenspan has adopted a more cautious approach, noting that businesses are revving up slowly while their ability to raise prices remains nil, or nearly so. That means he may be in no rush to boost interest rates.
More of the half-empty economic rhetoric may be in evidence Wednesday in the beige book, the central bank’s region-by-region rundown on how rapidly activity is gaining momentum. Expect comment about how companies are restoring their order books, but slowly.
Economist Ian Shepherdson said after last week’s Greenspan testimony before Congress, “Rates aren’t going up just yet, but they will.”
Shepherdson, of High Frequency Economics in Valhalla, N.Y., said the question remains whether the central bank chief must be convinced a truly robust revival is in place before policymakers pull the trigger.
“Would it be enough for a reasonable central banker to be pretty sure it is coming?” Shepherdson asked.
“Greenspan has all but ruled out a May tightening,” he added, and the Fed chief seems to be dropping a strong hint that tighter money won’t arrive before August.
STOCKS
Earnings drag
The stock market has been anticipating an explosive recovery for corporate earnings, but so far the boom has encountered a wet fuse.
Market strategist Steven Young said the outlook for Wall Street is a continued subdued performance.
Stocks “are constrained by above-average valuations,” said Young, of Banc of America Capital Management in St. Louis.
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Since the Fed last reduced rates in mid-December, he said, “the Standard & Poor’s 500-stock index is up just 2.5 percent, compared with a 4.2 percent average gain after the previous nine easing cycles.”
What do stocks need for further gains? According to Young, “a faster rise in corporate earnings and continued low interest rates.”