Economic indicators: Some green shoots, but weeds too

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A smörgåsbord of economic data released Thursday continues to suggest the U.S. economy continues to show 'fits and starts' - some 'green shoots' that Fed Chair Ben Bernanke spoke of, along with a lack of progress in other areas/metrics.

First, the Chicago Purchasing Managers Index rose to 40.1 in from a very-low 31.4 in March, the Institute for Supply Management announced Thursday. Readings above 50 indicate an expansion; under 50, a contraction. A Bloomberg News economists' survey had expected the Chicago PMI to rise to just 35 in April -- the Chicago PMI is closely watched because it is generally viewed as a representative indicator of sentiment in the nation's industrial/manufacturing core.

Small victories

Jonathan Basile, economist for Credit Suisse Holdings Inc. in New York, argued economic conditions are improving, incrementally.

"Things aren't better, but they're kind of bottoming out," Basile told Bloomberg News Thursday. "Stabilization in the manufacturing sector, particularly if orders begin to show improvement, would tell us the inventory adjustment related to large contraction in gross domestic product in the first quarter would be waning."

Meanwhile, U.S. consumer spending and incomes suffered setbacks in March. Real consumer spending, a metric that's adjusted to account for inflation declined 0.2 percent, the U.S. Commerce Department announced Thursday. Consumer spending did rise 2.2 percent in Q1, but almost all of the increase occurred in January, suggesting one-time cash flow gains - not wage increases - boosted spending earlier in the quarter. Also in March, real after-tax incomes were flat.

Economists surveyed by Bloomberg News had expected March consumer spending to be flat and real after-tax income to decline 0.2 percent.

Consumer spending fell at an annual pace of 4 percent in the second half of 2008, and most economists agree that metric will have to reverse in a sustained way for the U.S. economy to grow at capacity.

However, if Societe Generale U.S. Economist Stephen Gallagher is correct, the United States will struggle in its return to growth-at-capacity because he expects Americans will save at an above-normal rate for several years.

"The deterioration in wealth suggests a rise in the savings rate toward 6-8% in the next few years," Gallagher told marketwatch.com Thursday.

Little sign of inflation

Finally, inflation remains tame, which is good news for investors, business executives, and consumers alike. The Personal Consumption Expenditure Index was unchanged in March, the U.S. Labor Department announced Thursday. Further, the closely watch core index – which excludes the often-volatile food and energy component – increased 0.2 percent.

Consumer prices have rise just 0.6 percent in the past year, with the core rate rising 1.8 percent – further evidence that the record fiscal and monetary stimulus is not fanning the flames of inflation (so far).

Economic Analysis: A mixed bag of macroeconomic data. The most impressive data point was the Chicago Purchasing Managers Index, which jumped nicely to 40.1 in April, albeit from a very low level. If that momentum continues, that's good news for the United States. The worst data point? The 0.2 percent decline in real consumer spending in March. Real consumer spending remains a major component of economic growth, but it will be hard for Americans to increase spending when their incomes are stagnant – a problem policy makers and business executives will have to address, if they seek a sustained U.S. economic expansion.

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