Making sense of last week's economic data

Last week's economic reports have left economists divided over its near-term direction.

Some appear internally conflicted. James Mehring wrote this in BusinessWeek:

It is worth noting that the first-quarter real gross domestic product report really wasn't as weak as the 3.1% annualized increase would suggest. More imports, which are subtracted from GDP, weighed on growth, but strong imports do signal healthy domestic demand.

That last statement is meaningful if you think that the demand can easily be converted into production. Otherwise, it sounds more like self-consolation. Not that the trade deficit it implies should be much of a consolation.

The Economist has a more sober analysis.

So far, America’s consumers have saved the day... But to do so, they have taken on a lot of debt... But as interest rates rise, this well of consumer demand seems to be running dry... There had been hope that businesses would step in to help, but the latest figures make that unlikely. Inventories rose sharply in the first quarter...

The Economist also provided an explanation of why US job growth has been poor.

The most likely explanation for sluggish recovery in payrolls comes from Erica Groshen and Simon Potter of the Federal Reserve. They argue that while most unemployment in earlier slowdowns was cyclical -- firms laying off employees who would then get their jobs back (or ones very like them) when the economy picked up -- in the last two it has increasingly been structural, meaning that people need to switch sectors, locations or skills in order to find a job. Since it takes much longer to do the latter, payrolls are not rebounding as they used to.

Another recent report in The Economist warned of the impact that the current account deficit can have on the economy.

[E]ven a gradual reduction in the current-account deficit...could feel unpleasant. That is because America's domestic demand growth will have to grow more slowly than its GDP. A recent analysis by Macroeconomic Advisers, a consulting firm, suggests that halving America's deficit over a decade, with GDP growth at its recent average, will require that annual domestic demand growth slow to 2.6%, more than a full percentage point below its average in 1994-2004.

I look at how the uncertainty in the economy is being reflected in the financial markets in "The elusive consensus".