Real GDP spurt
Real GDP expanded at a 5.8 percent rate in the first quarter after rising at a modest 1.7 percent in the fourth quarter of last year. Consumer spending played a role in the gain, although the rise was nearly half of the pace of the fourth quarter when auto sales were the primary purchase. Business fixed investment declined again, but at a much slower pace than the previous quarter. Spending on equipment was practically flat, but structures continued to drop at double-digit rates. In contrast, residential investment grew rapidly. Business inventories once again were liquidated in the first quarter, but at a significantly slower rate than the fourth quarter. Consequently, the difference between the $119.3 billion pace of decline in the fourth quarter compared with the $36.2 billion rate of decline in the first quarter actually added to GDP growth. The net export gap widened sharply in the fourth quarter as imports grew faster than exports. This is not unexpected during a recovery since increased demand for goods and services leads to an increased demand for imported and domestic goods. Finally, government spending expanded at a 7.9 percent rate in the first quarter on top of a 10.2 percent rate in the fourth quarter. No question that the public sector is helping to get the economy out of its slump.

Is there anything in the first quarter (old news) GDP picture that bodes well for the future? Indeed, there is. It is unlikely that government spending will continue to grow at the rapid pace of the past two quarters; however, the private sector is likely to see increased expenditures. Real final sales rose at a 3.8 percent rate in the fourth quarter and a 2.6 percent rate in the first quarter. These are moderately healthy growth rates. Combined with the sharp acceleration of inventory liquidation in the previous five quarters, it does suggest that producers are going to have to start rebuilding inventories. Coupled with the increases in durable goods orders in recent months, this suggests that capital spending has seen its worst quarters. It remains to be seen, however, how rapidly capital spending will be able to recover.

The GDP deflator increased at a 0.8 percent rate in the first quarter after declining at a 0.1 percent rate in the previous quarter. Quarterly distortions aren't uncommon. The chart below compares the GDP deflator to the employment cost index by looking at the year-over-year change in both inflation measures. The downward trend in inflation is more marked in the GDP deflator, but the employment costs index just posted its smallest yearly rise since fourth quarter 1999. These measures indicate that inflationary pressures are not a problem these days; giving Fed officials more room to maneuver monetary policy in coming months.

Home sales up in Q1
New home sales fell 3.1 percent in March while existing single-family home sales decreased 8.3 percent during the month. Despite the monthly declines, total new and existing home sales managed to jump 8 percent in the first quarter. It isn't uncommon to see a spurt in the first quarter of the year when weather conditions are unseasonably mild, as they were this year. Home sales will probably soften from the first quarter pace but even if sales decline as much as they rose in the first quarter, subsequent quarters are likely to see a pretty healthy housing market. In turn, retail sales for furniture and appliances could see some healthy gains going forward.

Durable goods changes surprise market players
The regularly scheduled durable goods report came with a surprise announcement from the Census Bureau: that the semiconductor component of the series would no longer be included because the sample size was too small to be meaningful. This component accounted for roughly 3 to 3.5 percent of total durable goods orders, so its exclusion doesn't necessarily render the entire report meaningless. Nevertheless, semiconductors are an important part of our economy so the figures will be missed. The organization for the semiconductor industry, Semiconductor Equipment and Materials International, releases monthly shipments and bookings data. This report will become more important in absence of other data.

The new durable goods report (excluding semiconductors) fell 0.6 percent in March after rising 2.7 percent in the previous month. Total new orders rose for the second straight quarter after recording five straight quarterly declines. New orders for nondefense capital goods, a leading indicator of capital spending, also posted a modest gain in the first quarter, although orders did decrease 2.8 percent in March.

Fed officials and other economists have noted that the capital spending recovery is likely to be modest and not likely to begin in earnest until later in the year. The lack of a decisive jump in nondefense capital goods orders in the first quarter supports this view.

Confidence stalls
The University of Michigan's consumer sentiment index fell back to 93 in April from a level of 95.7 in March. On the whole, this small of a difference doesn't mean that consumers are feeling less confident than a month ago. However, it does appear that confidence has stalled. Consumers need improvement in the job market (new jobless claims below 400,000 and larger gains in nonfarm payrolls) or decided improvement in the stock market. Consumers are mainly responsive to their personal finances, which depend on earnings from wages and relative price stability (lack of inflationary pressures). However, the only news that the majority of consumers are bombarded with daily are changes in the stock market, principally the Dow Jones Industrials Average. As long as the Dow is not going to show at least marginal, albeit steady, gains, consumers are not going to feel very good about the economy.