Is the Economy Really on the Mend?

GOOD MORNING. Stocks in Asia closed lower today; U.S. futures are pointing to a higher open.

Is the economy really on the mend? The government releases its first estimate of fourth quarter GDP at 8:30 this morning—and the markets will be looking for a big improvement from the third quarter’s pace of growth.

Consensus expectations are that the economy grew 4.5%, more than double the pace in the third quarter. Some economists are predicting 5.4% growth, which would be the fastest rate since the first quarter of 2006. Economists at Barclays Capital are in the middle of the range, calling for 5% growth—“confirmation that the recovery is gaining speed.” Increased consumer spending is likely to have fueled the expansion, along with a pickup in certain types of business investment and inventory rebuilding.

One key figure to watch: personal consumption growth. It’s forecast to be 1.8%, down from 2.8% in the third quarter. The figure is a measure of consumer spending—which accounts for 70% of the economy, and anything less than 1.8% “will skittle the market, says Stephen Pope, chief global equity strategist for Cantor Fitzgerald in London.

Of course, the deeper question is whether the gains are sustainable. Economists generally expect the pace of growth to slow in the first and second quarter, but some now worry that the slowdown could result in a double-dip recession. First-time jobless claims have rebounded to 482,000, notes Gluskin Sheff chief economist David Rosenberg. Housing still looks shaky, according to the latest sales figures. And while the Fed brightened the tone of its outlook in its recent policy statement it also made some cautionary points, namely that “bank lending continues to contract,” consumer spending “remains constrained,” and “employers remain reluctant to add to payrolls.” Those are hardly good signs for robust growth. And Rosenberg, for one, predicts that there’s a “non trivial chance” of the economy relapsing into recession as early as the second quarter.

Other strategists are more optimistic. Pope says it’s generally accepted that 2009 ended on a good note and he now worries that the market is “overdoing the gloom” in the new year. A high growth rate in the fourth quarter is well-discounted in the market and it “would be a shame to waste a good data point and become obsessed with double-dip fear.” Growth in 2010, he predicts, will be “steady if not sparkling.” But the economy will grow.

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