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Outlook for the Economy

Despite all the predicaments that arose during the first quarter, consumer spending continues and the market has been resilient.

Robert Johnson, CFA, 03/29/2011

Real GDP of 3.5% to 4.0% is still possible if inflation--which could hit 3%--doesn't get out of control.

Watching the consumer is key. There are headwinds and tailwinds, but focus on spending.

Corporations are investing in themselves again.

For once, I am really glad I didn't have a crystal ball to predict the future. Three months ago, if my crystal ball had foreseen almost $4 per gallon gasoline, major rioting, government changes across the Middle East, and one of the largest earthquakes in history, I would have concluded that consumer spending was in for a major tumble and that the stock market would fall at least 10%-20%.

Instead, consumer spending continues to increase while the S&P 500 is off less than 4% from its recovery high.

This is in stark contrast to the spring of 2010 when the market fell 16% and consumer spending moved from near-double-digit rates to close to zero in a couple of months on the heels of "just" the European debt crisis and the mysterious May 2010 Flash Crash.

I suppose the pessimists could claim it's just a matter of time before the market wakes up to the bad news and tumbles again. However, I believe a stronger economic base and an economic recovery that has finally reached escape velocity may explain the market's patience this time around. (But I still worry that the market has pooh-poohed the effect of the Japanese situation a little too soon.)

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