This was a week of redemption for economic-recovery skeptics, the small but growing minority of analysts who see recent gains in consumer and employment indicators as overstating the real extent of the U.S. rebound.
Those skeptics knew it was going to be a good week after Federal Reserve Chairman Ben Bernanke roused markets Monday morning by spouting theories seemingly custom-made for their point of view. In a speech, Bernanke pointed to the fact that employment gains are outperforming economic models. The clear implication, therefore, was that the improvements can't be sustained unless the Fed steps in, again.
It went on from there. Positive but weaker than expected appeared to be the catch phrase of the week, and it applied to data releases concerning housing, industrial output and consumers' economic outlook.
Even very positive developments, like Friday's reported jump in retail spending, could be viewed as the glass being half-full or half-empty, depending on your point of view, Scott Anderson, a senior economist at Wells Fargo Securities, wrote in a note to clients. Reading between the upbeat headlines suggests the rebound could prove to be short-lived he added.
Here's a look at how key areas of the economy fared this week:
Housing. There was an understated but significant change in the consensus view of where this market is headed. The predictive needle moved slightly into negative territory, as economists who previously said housing is weak but about to turn the corner seemed to signal that they're not so sure about that now. Home sales declined, as did the average price of dwellings in 20 cities, according to the widely followed S&P/Case-Shiller home price indices. I expected to see [the housing market] coming back by now, and it's not, Karl Case, co-creator of the indices, told Bloomberg Radio after Tuesday's numbers came out. Those weak figures were especially harmful to investor sentiment, coming after a week in which divergent data failed to instill confidence in the housing recovery, said Justin Hoogendoorn, managing director of strategic analytics at BMO Capital Markets.
Employment. Both initial and continuing unemployment-benefit claims extended a downward trend that's now about six months old. A revision in the government's number-crunching methodology affected nominal figures, but the general pattern was preserved. While it's now taken for granted that a labor recovery is underway, the creeping fear is that the job-creation cycle might slow down, as businesses reach labor equilibrium. Such a view, endorsed by Bernanke this week, could mean more monetary easing by the Fed.
Industrial output. A segment of the economy that had seemed to be making a big comeback sputtered. Reports from the Fed's regional branches confirmed high levels of growth in late December and January, but also indicated that exuberance was easing in February and March. Industrial and manufacturing activity reports from the Dallas, Chicago, Kansas City, and Richmond Federal Reserve banks all fell from prior-month levels, and they were considerably shy of consensus forecasts. The reports all showed increases, albeit disappointingly small ones. A similar trend emerged in the Commerce Department's data on durable-goods orders.
Household finances. A counter-intuitive dynamic unfolded in many American households, data released this week showed, as the improving job market made people optimistic despite the average U.S. worker's finances being seriously constrained. The Thomson Reuters/University of Michigan Consumer Sentiment Index, a widely followed indicator of where the general public sees the economy heading, posted a seventh straight monthly gain in March. Americans spent more and saved less, while personal income fell from month to month. A running story line suggests many Americans are just happy to return to work, even if they're earning less than before and having to use that first paycheck to pay down debt or make long-delayed purchases.