Nearly all of us are consumers of economic information and data. We are interested because economic strength leads to corporate profits and higher stock prices. We need to know!
The key issue is pretty simple. Many question the "second derivative" rally in stocks. Their point is that economic data are bad, very bad. Evidence showing that conditions are now showing "less weakness" -- well -- that is not really bullish. The economy, consumers, credit, and housing are all still very bad.
A Review of Key Sources
The advance data on 1st Quarter GDP came in worse than expected. A big decline in GDP is not good. Some noted a few positives:
- Richard Hamilton at Econbrowser, one of our featured sources, is a realist with his own recession method. His rating is negative, but he notes the increase in consumption and cautiously observes that growth could be positive by year end.
- Joe Wiesenthal, citing economist Richard Moody, also suggests Positive GDP as Soon as Next Quarter. He notes (emphasis from original), "Thus, through the process of what we call addition by less subtraction, the deductions from real GDP figure to be significantly smaller in Q2 than was the case in Q1. As such, a modest increase in real GDP during Q2 is not out of the question."
- Calculated Risk (another featured source) emphasizes that GDP is a lagging indicator, although he is cautious on the strength of the recovery. Readers should click through to see the excellent charts.
There are other miscellaneous indicators. Ed Yardeni, one of our favorite economists, sees twelve positive factors drawn from economic data and earnings.
Looking Forward
Most data sources provide analysis of coincident or lagging data. We all hope to look ahead, but few provide such insight.
The ECRI (Economic Cycle Research Institute) has a strong record of forecasting recessions and recovery.
My RealMoney Colleague Anirvan Banerji does a careful explanation and defense of the ECRI indicators, which were excellent in predicting the recession. (Subscription required and worth it. Regular readers know that we subscribed to RealMoney for years before joining as a contributor. Consider a trial subscription.) The key quote is as follows:
The "giant error of pessimism" is now rampant. This is why many will be blind to the light at the end of the tunnel that marks the exit from this recession. But to ECRI's array of objective leading indices, designed specifically to spot recessions and recoveries, the end of the recession is now in clear sight.
The indicators show that the economy is "on the cusp of a growth rate cycle."
Our Take
We expect pre-occupation with the stress test results, due for release on Monday. Many are suggesting that the assumptions in the test are too soft. Meanwhile, there are strong indications that the assumptions might be acceptable.
We expect another bad payroll employment report next week (a lagging indicator) and continuing skepticism about the economy. It all fits our explanation for why the market has defied the lagging economic news. Current equity prices started building in depression scenarios after the fall of Lehman and the first TARP debate. The market is now climbing the wall of worry.
