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By Jason Stipp | 05-19-2011 12:37 PM

Too Soon for Doom and Gloom

Although recent data indicate slowing in GDP and manufacturing, digging beyond the surface shows the economy is still holding up.

Jason Stipp: I'm Jason Stipp for Morningstar.

After a series of some disappointing economic reports, there seems to be a growing sense of pessimism emerging about the economy. Here to give a reality check on that and tell us if we really should be worried is Morningstar's Bob Johnson. He is director of economic analysis. Thanks for being here, Bob.

Bob Johnson: Great to be here.

Stipp: So, I do feel like there is a little more doom and gloom after a few recent reports. I wanted to get your take. Do you feel that there also is some doom and gloom out there that maybe we hadn't seen before, and if so, why?

Johnson: I think statistically, the numbers are there indicating a slowing. We had GDP coming lower than expected and considerable slowing from the fourth quarter. We've had some regional purchasing manager's reports and the industrial production report that indicate that the manufacturing sector, which had been so booming and such an important part of this recovery, was beginning to slow. We saw the initial unemployment claims for a while creep continuously upward, and we've seen some weak data out of the housing market. So there is been a number of areas that look like on the surface that there has been weakness.

Stipp: Okay, let's taken them one by one, then. So, GDP report we got the first look at that; it did show some slowing, and I think that did concern a lot of folks. Did it concern you?

Johnson: No, I don't think the report concerned me as much because I think there is a lot of underlying data there that people didn't realize. The biggest slowdown was from government spending. If you added back government spending, GDP was roughly equal in the first quarter as it was to the fourth quarter. So it's a special effect from government spending, and it was defense spending, it wasn't everyday spending, so it's something that's going to come back.

So, I wasn't worried initially, and now we've got some data that indicates the number may have been substantially understated, and when we get the second look at the number, when they revise it at the end of the month, that it will be revised upward to as much as 2.5%. The reason that's going to be revised up is because a big part of that report is retail sales, and the retail sales number for February-March period was revised substantially upward after the fact. So, I think there is a good shot that GDP is going to get revised upward because of the strong retail sales data we've already seen.

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