GDP Way Up. Dow Way Down

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A trader stands on the floor of the New York Stock Exchange

The economy positively roared out of the 2002 gate, racking up 5.8 percent GDP growth in the first quarter and pleasantly surprising just about everybody when the Commerce Department announced the results Friday. The GDP number is the best since the last quarter of 1999, and the slowdown of 2001 — recession, not a recession, it's academic — has now certainly gone down as the shortest in history.

Where'd it come from? The government, both from a vigorously rate-cutting Fed and a tentatively tax-cutting Congress. Consumers, whose stalwart spending habits grew at an annual 3.5 percent pace even after all the good car-buying deals were gone. And businesses, which continued to slash inventories by $36.2 billion in Q1 — but not nearly as much as in the fourth quarter, when they unloaded a record $119.3 billion.

The inventory difference was the statistical hero of the hour, adding a full 3.1 percentage points to the GDP number. And yet it also indicated — along with business spending, which fell by only $18.2 billion after shrinking $47 billion in the fourth quarter — that the fire sale is ending, and the re-ordering, re-selling, and yes, recovering is poised to begin.

But the big question — when? — is what's troubling Wall Street; government stimulus and statistical anomalies do not a genuine recovery make. Although the U.S. economic ship does appear to be heading into a turnaround, we were clearly still turning — the GDP number couldn't hide that businesses were still clearing old stock and still not laying out for new stuff. And consumers, though they haven't let us down in years, still seem resolved to play hard to get. No sooner had stocks clinked a few morning glasses on the GDP news than the Street was hit with the University of Michigan's consumer sentiment report. Down again in April, to 93.0.

That note fit in rather neatly with the one-word recovery forecast that's been settling on the tongues of investors all week: anemic. Alan Greenspan is largely responsible, writing in the Wednesday-released "beige book" that yes, the recovery was coming, but it might not be anything spectacular. The lack of business spending is particularly worrisome, the consumers' part hard to take for granted, the labor market still "slack" (meaning unemployment may stay up for a while). Energy costs are staying up, and manufacturers' willingness to upgrade their equipment remains limited.

And stocks? There's telecom, still mired in overcapacity, and tech, still waiting for broadband (and something to use it for), and Merrill Lynch, now apologizing for telling everybody to buy stocks. Investors — not much cheered by the first two weeks of earnings season — are waiting on manufacturers, who are waiting on businesses, who are waiting on customers. Everybody's wondering when the Internet is going to start getting where it's going, and starting to think that it may be a little while until it all gets humming again. One more quarter? Two? Maybe more.

On all that evidence — with some nice geopolitical uncertainty thrown in for good measure — Wall Street is having trouble getting out bed in the morning. After the University of Michigan took the air out of the GDP number, the Dow and NASDAQ started to sag under IBM and Microsoft and not a few other heavywieghts, and after a last trading hour of total dejection, the Dow had had its worst week since September and was back under five digits at 9,910. The NASDAQ sank 49 to 1,663. Only bonds celebrated, and on the postgame shows, the capitulation-watch was back on.

All this was on weak volume. The markets are still a little underpopulated; there's a lot of money on the sidelines, waiting to see where Israel goes, where Venezuela (or Argentina) goes, where the terrorists show up next.