Vital Signs: Will We Escape a Recession?

Over the past several weeks, an important trend in much of the economic data has emerged: Reports have generally beaten expectations. Of course, the numbers still portray a weak economy that remains vulnerable to any new shock from the financial markets, oil prices, or whatever may lurk. However, the data seem to offer a rebuttal to the abject pessimism seen in recent measures of consumer and business confidence.

May reports from the Institute for Supply Management on manufacturing and nonmanufacturing activity and April data on retail sales, employment, and factory orders, along with an upward revision to first-quarter economic growth, have clearly calmed the worst fears about a severe recession. But they also come tantalizingly close to suggesting that growth is stabilizing at a point where the economy might even escape a recession altogether.

Several economic reports in the coming week put that thesis to the test. On Monday, look for April data on pending sales of existing homes, which tend to foreshadow the actual sales data by a month or two. Actual sales have shown clear signs of stabilizing in recent months, after a two-year decline. That could be a hint that improving affordability is beginning to shore up demand, and that the slide in new-home sales may be close to bottoming out as well.

Then, Tuesday offers an update on April foreign trade, which has been a crucial support of the economy during the fourth and first quarters. Improvement in the trade deficit, by itself, contributed a full percentage point to economic growth in the fourth quarter and another 0.8 point in the first quarter, a big factor keeping real GDP growth in positive territory.

The April retail sales report, due on Thursday, will receive special scrutiny for signs that the tax rebates are having a positive impact on spending. Several upbeat May reports from chain stores suggest some of the money is finding its way into the malls. The impact of the checks will be a big factor in the buoyancy of GDP growth in the second and third quarters.

One implication of the better-than-expected data of late is the gradual shift in the focus of investors and Fed policymakers away from worries about growth to concerns about inflation. The week’s final key report will be Friday’s consumer price index for May. Higher gas prices are expected to push up the overall CPI, but the core index is expected to show no signs of broader price pressures.

The markets will also be very interested in what a number of Fed officials have to say in several speeches this week, including Monday’s remarks by Chairman Ben Bernanke. On Wednesday, the Fed’s Beige Book report, a summary of economic conditions in each of the Fed’s 12 districts, will also receive special attention in advance of the Fed’s next policy meeting on June 29-30. A deep division among policymakers, between those who are very concerned about future inflation and those less worried, has developed over the last several weeks. If the economy is indeed stabilizing, then talk of the need to hike rates in order to get them back to more normal levels would not be far behind.

Here's the weekly economic calendar from Action Economics.

  Top Economic Reports