The preliminary estimate of U.S. Gross Domestic Product in the first quarter of 2010 is 3.2%, close to the consensus forecast of 3.3%. This marks a significant deceleration from last quarter’s growth of 5.6%, yet indicates the recovery continues, albeit at a pace more sluggish than past recoveries.  Inventory rebuilding again was a significant component, contributing half of the quarter’s growth.  Most economists are celebrating the fact that personal consumption expenditures were up a strong 3.6%, the fastest since the first quarter of 2007.

The key question is the sustainability of economic growth.  Given that disposable personal income actually fell after excluding the impact of stimulus programs, and the personal savings rate declined to 3.1%, consumer spending may slow in the coming months.  In addition, the positive effects of inventory rebuilding should begin to wane in the quarters ahead.  For economic growth to surprise to the upside, we believe businesses need to increase spending, and the economy needs to create jobs.  Next Friday’s employment report will be closely watched (consensus expectations call for 200K jobs to be created in April).

As for the equity markets, the combination of the Greece/Portugal/Spain debt downgrades and the Goldman Sachs criminal inquiry spoiled the party.  Corporate earnings continue to surprise to the upside, fueling excessive optimism and leading most pundits to expect a shallow correction at best.  Today’s action saw heavy selling, with flows into safe-havens such as gold and Treasuries.  We believe now is not the time to chase equities higher, and prefer to be patient as the sovereign debt contagion spreads and financial reform legislation continues to develop.


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