Friday, April 30, 2010

The Recovery Is Moving Forward

This morning's economic reports provide solid encouragement to the premise that the economic recovery is moving forward at a good clip.

Here's some key points to be highlighted:

1) Despite the seemingly underwhelming pace of GDP growth in Q1 (3.2% annualized), the most important aspect of the report was that the two pivotal engines of GDP are indeed making a credible comeback. Personal consumption rose by a robust 3.6%- following moderate gains in the prior two quarters- confirming that the consumer is plowing ahead, underpinned by a somewhat less ominous labor market picture and an impressive stock market rally.

2) After a two-year period of a "slash-and-burn" reaction of the corporate sector to the severity of the economic downturn, capital spending is back. It rose at a 4.1% annual rate in Q1, following a 5.3% pace in the prior quarter, with the all-important equipment and software category rising by a solid 13.4%.

3) With personal consumption and capital spending on the rebound and the inventory cycle still in full force (inventories contributed nearly $51 billion to last quarter's growth, after a contribution of a staggering $129 billion to the prior quarter's GDP), the recovery has adequate fuel to offset the headwinds stemming from tight lending standards and a struggling housing market and has the potential to move ahead at a 3.5-4.0% clip in the balance of the year.

4) The five-point spike in the April Chicago PMI to 63.8- its highest level in five years- suggests that the turnaround of the manufacturing sector in the last nine months or so remains intact. This, if broadly validated by the ISM report on monday, sets the stage for a solid increase in this month's industrial production and also for moderate job gains ahead in a sector where employment had been literally decimated in the prior three years.

Anthony Karydakis