In a TIME.com Q&A, TIME senior economics reporter Bernard Baumohl takes a look at Friday's two major reports — the GDP and the University of Michigan month's-end consumer sentiment survey — and wonders how the two disparate trends intersect.
TIME.com: Let's start with the backward-looking indicator, the GDP. Weren't we supposed to be near zero growth?
Bernard Baumohl: It was a real surprise. But the numbers reflect the resilience of consumers, who despite the gloomy economic outlook this spring continue to purchase cars and homes without skipping a beat. And it shows how dependent this economy is on those consumers.
Last year, consumer spending accounted for 70 percent of economic growth; in the first quarter, shoppers carried even more of the load, contributing 90 percent. That means that business and capital spending is really playing no role in the current growth. There's no stimulus at all from businesses, which makes our reliance on consumers all that much greater.
How is this happening, with consumer confidence on this seven-month slide? Don't those numbers mean anything?
Trying to predict what consumers will do has always been the soft spot of economics as a science — it's an exercise in futility. Consumer sentiment numbers are thought to be a good predictor, but there are times that there's a big difference between what consumers think and what they do.
If consumers are indeed worried about layoffs, about unemployment, about their economic future, it's not showing up in their spending habits. Maybe they realize that the NASDAQ crash was a once-in-a-generation event, maybe they've gotten a better understanding of how markets work. But they're still buying things.
In April alone, new home sales hit a record high — and home purchases are like an umbrella — buy a home, you buy refrigerators, electronics, furniture, lumber, everything. Numbers like that really do bode well for the economy.
So the confidence numbers aren't always useful, but they're all we have to look ahead. What was in Friday's University of Michigan report?
Michigan has two sets of numbers — the mid-month preliminary number and the end-of-the-month final number, and in April something interesting happened. Friday's number for all of April was down, at 88.4 as opposed to 91.5 in March, but that 88.4 was up slightly from the mid-month number of 87.8.
That could mean that the Fed's surprise move at the end of April may have had a slight impact on lifting consumer sentiment. With the Fed acting aggressively to end the slowdown, a turnaround in consumer confidence could be in the works.
So where does all this leave us?
We're still in an uncertain position. The GDP numbers will be revised as the month goes on, and I wouldn't be surprised if these numbers went down a little. The big question will be with the Fed — has it moved enough, and how much will it move on May 15?
Right now, my guess is another 50 basis points, mostly because unemployment is still on the rise and Greenspan still has to be worried about the consumer. Right now, there's a sense that the worst is over, both in the economy and in the markets, but if consumers stop spending they can still tip this over into a recession.
Consumers have always been an enigma. All the mathematical models in the world have never been able to predict consumer behavior, and what we've seen from the confidence numbers is that even the consumers themselves aren't great predictors of what they're going to do with their wallets. Right now, it looks like they could be pulling us through again.