This was an eventful week full of economic numbers releases, Fed activity, and market rallies. The week revealed a weak and limping economy on the cusp of recession, but not quite there, and so far avoiding catastrophe. The market interpreted the lackluster but not yet recession-like economic numbers as good news and soared to a level that has almost wiped out this year's losses in the major indices.
Here are a few more in-depth economic snippets.
- The Fed cut interest rates one-quarter point on Wednesday. Major banks including Bank of America (NYSE: BAC), Wachovia (NYSE: WB), SunTrust (NYSE: STI), and PNC (NYSE: PNC) reacted by lowering their prime lending rate from 5.25% to 5%. After cutting rates for the seventh time in eight months for a total of 3.25%, the Fed signaled that it might be done cutting. The Fed report omitted a key phrase, "Downside risks to growth remain." Many took the omission as a signal that the Fed thinks the economy probably won't get any worse, and the markets rallied. I hope you're right, fellas.
- First-quarter GDP came in at positive .6%. Many were encouraged by the fact that this number is still positive. However, a closer look at the number reveals that this number was largely due to inventory buildups, which will likely hurt the barely positive GDP next quarter. It looks like we're heading toward recession; it's just taking longer to officially get there than many thought. Does that mean it will take longer to get out of it? Anyway, the market took the number as a positive sign and partied like it was 1999.
- The dollar rallied. This is news because the dollar almost never rallies anymore. Maybe people just think that since housing prices couldn't go up forever, the dollar can't go down forever. Or maybe the smaller Fed rate cut, accompanied by the indication that it's done cutting, gave the signal that the Fed was also done giving inflation concerns the cold shoulder.
- The housing slump continues to get worse. Data this week showed that home prices are in a freefall and foreclosures are doubling. The S&P/Case-Shiller Home Price index, an index of home prices in 20 U.S. cities, fell 13% in February from the year-ago period. Sure, it seems bad. But remember, many claimed that the housing market couldn't begin to recover until prices fell a lot farther. Well, now they're falling. You see, bad news is good news.
- Consumer spending was up more than expected in March. The Commerce department reported that consumer spending increased .4% in March, twice what forecasters had expected. The number may sound good, but it really isn't. Most of the increase is attributable to inflation -- i.e., higher prices for food and gasoline. When inflation is taken out, the number is a lackluster increase of .1%. Consumer spending accounts for two-thirds of economic activity, and this number really stinks. Good news is actually bad news.
- The government reports better-than-expected payrolls for April. This is very good news because payrolls are considered a key indicator of economic health. The economy did shed jobs, but only 20,000, as opposed to the 80,000 job losses predicted by economists. The unemployment rate actually fell to 5% from 5.1% in March. These better-than-expected numbers indicates that we may actually be avoiding recession, a best-case scenario of most recent prognostications.
The economy looks bad but seems to be avoiding catastrophe and possibly even recession. Blue-chip companies General Motors (NYSE: GM) and Procter & Gamble (NYSE: PG) reported better-than-expected earnings. Although the economy sure looks lousy, that might be a good thing. The economy needs to bottom out and look terrible before it begins to recover. The market seems to be indicating that it thinks the economy has bottomed, a vantage point from where stocks usually recover, without even dipping into recession. How else can one explain the fact that the economic numbers stink and the market loves it?
Hopefully, bad news is good news because it's not even worse. But it sure seems like we're a long way from a strong economy. Stay tuned.
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