Will The Growth Momentum Last?

Small business confidence slipped last month, based on a report released today by National Federation of Independent Business. “It looks like everyone became more pessimistic in March,” said NFIB chief economist Bill Dunkelberg in a statement. “Or, perhaps, this is a ‘new normal’ and we are unlikely to see the surges usually experienced at the start of a recovery… Today’s recession-level reading is, all in all, a real disappointment.”

Is more disappointment coming for the economy overall? It’s unclear, although there’s a bit more reason for keeping the debate bubbling these days. The uncertainty can be blamed in no small part on the rise in oil prices in recent weeks, and the fallout seems to be infecting more than small businesses. Consumer sentiment in March, for instance, stumbled, partly due to higher gasoline costs.
But don’t throw in the towel just yet. The last full month of economic reports (February) suggests that growth, while taking some hits, still has the upper hand, or at least a robust defense. The main drag is the housing market, which is no trivial factor. But it’s not yet obvious that the weakness in real estate will torpedo the broader economy. Indeed, the optimistic view is that the economy has continued to expand despite the troubles in housing.
The broad trend certainly remains positive on a rolling 12-month basis, which offers some insulation from the fallout in housing…

But the question is whether the revival in economic fortunes is under pressure for the foreseeable future. Not necessarily, or so the early clues about March’s economic profile imply. Initial jobless claims, for instance, are still trending lower. Another hopeful sign: the labor market continues to mint new jobs in the private sector. The ISM Manufacturing Index for March also suggests that the economy will continue growing.
For the moment, fund managers are willing to give the recovery the benefit of the doubt. As Reuters reports today:

Investors pumped up their exposure to stocks in early April despite some concern that global growth will tail off, a Bank of America-Merrill Lynch poll showed on Tuesday. The investment bank’s monthly survey of 282 fund managers found a net 50 percent to be overweight in equities compared with a net 45 percent in March. Cash holdings dropped to a net 10 percent overweight compared with 14 percent a month earlier. Bonds continued to be unpopular with a net 58 percent underweight, albeit a slight improvement from March’s 59 percent. The growing risk appetite reflected by these numbers, however, comes against a backdrop of easing expectations about the global economy.

Update: There was an error in the original chart of the rolling annual percentage changes in the CS Economic Indices. A revised chart with the correct data has been posted.