Although we still expect the fourth and first quarters to show back-to-back declines in real GDP of more than 6 percent - sings are accumulating (especially in consumption and housing) that the worst is now behind us, say the analysts at Global Insight. This does not mean that we think the economy is now ready to grow again-we expect GDP to bottom out only in the second half of the year. Nor does it means that the labor market is ready to turn-we still expect the unemployment rate to reach 10 percent before it peaks.

But it does mean that there is now some solid evidence that the period of economic free-fall is now behind us, that the next step will be a slower rate of decline, to be followed by a bottoming out in the second half of the year, and a recovery gathering pace in 2010. We still expect a severe 3.5 percent decline for GDP this year, though, followed by a 1.4 percent rebound in 2010.

We still think that the first-quarter GDP outcome will be worse than the fourth. We expect a 6.6 percent drop, compared with the fourth quarter's 6.3 percent, despite a swing in consumer spending from sharp decline to modest increase. A much steeper drop in nonresidential construction and a very severe inventory adjustment wipe out the consumption improvement. Inventories fell in the fourth quarter, but are still far too high relative to sales and must contract sharply, producing a one-time hit to growth in the first quarter.

Improved retail sales this year indicate that the consumer spending plunge in the second half of 2008 (average rate of decline: 4.1 percent) is now behind us. Spending probably rose 1.3 percent in the first quarter, even as consumer sentiment remained at rock-bottom levels. But given continuing steep employment declines, lower household wealth, and still-tight credit, it is hard to make a case for a robust consumer recovery. We still expect spending to be down 0.9 percent on average in 2009.

The recent improvements in housing sales and starts have probably been exaggerated by the weather (bad in January, much better in February). But even allowing for that, it does seem that housing activity is starting to bottom out. Even though there will be a delay after housing starts hit bottom until residential construction spending starts to rise, the latter should occur by the end of the year.

The signals from the rest of the world remain mostly negative. We still expect world GDP to decline more than 2 percent this year, pulling down U.S. export volumes by 15.3 percent, while the downward momentum in business spending remains severe. We expect equipment spending to be growing again by the end of this year, but we expect the decline in business construction to extend through mid-2010. Both commercial construction (due to overcapacity and lack of financing) and drilling activity (due to low oil and natural gas prices) are turning lower.

Signs of stabilization in commodity prices have eased fears of deflation. By the third quarter of 2009, we still expect headline CPI inflation to be as low as minus 3.0 percent year-on-year, largely on lower energy costs. But core consumer price inflation has remained stubborn, and we now see the core consumption price index rising 1.1 percent year-on-year as of the third quarter, near the bottom of the Federal Reserve's 1-2 percent comfort zone, but not below it, as we had previously anticipated.

The Treasury's public-private investment partnership, by providing generous taxpayer loans to private investors, should succeed in taking some toxic assets off bank balance sheets. But for the banks in the worst shape, it remains questionable whether the prices that investors will pay will match the prices at which the banks will be willing to sell, leaving their solvency in doubt.

The Fed has now added direct purchases of long-term Treasuries to its arsenal of weapons aimed at the recession, which has helped to drive long-term fixed mortgage rates well below 5 percent. The Fed will eventually have to worry about how to withdraw its stimulus, but that will be a question for 2010, not today.

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