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The postwar bounce began Friday with better-than-expected numbers in both consumer confidence and retail sales. But behind the first rush of good news was lingering doubt about the economy's health.
Reflecting that concern, the Dow Jones industrial average took a quick climb of more than 100 points, then slid back relentlessly, finishing the day down 17.92 points.
Reports showed a slowing in the money supply, a sign that many worried consumers have been adding to savings. If that continues, any recovery could be sabotaged, because consumer spending comprises two-thirds of the economy.
Still, reports showed that consumer spending made a March comeback --- just as consumer confidence hit a 10-year low. But in the last few weeks, spirits have been bolstered by dropping oil prices and the news from Iraq.
Confidence thus far in April took its largest jump in more than a year, as the University of Michigan index bumped up nearly 6 points to 83.2.
But confidence may not translate to spending.
"It didn't mean that they would stop spending when war was coming, and it doesn't mean they will start when the war's over," said economist Paul Kasriel of Northern Trust. "I suspect what we have is a postwar bounce or an end-of-phase-one-of-the-war bounce."
Even after its rise, the Michigan index is lower than it was in December and dramatically more gloomy than a year ago. Sentiment now is about where it was after the terror attacks of 2001.
Yet consumers --- whatever their outlook --- have carried the economy in the three years since business investment collapsed, spending despite war worries, a woeful Wall Street and a dismal job market. Mostly, spending has been built on steady--- if modest --- income gains and a strong housing market.
While both have wobbled in recent months, neither has collapsed.
Optimists have pegged hope for a robust recovery on a spending surge. Consumer action would convince companies that investment --- and hiring --- would produce profits. And that scenario drew support from the Michigan survey.
"This ... jump holds out hope that the war's completion will refuel household spending," said Maury Harris, chief U.S. economist with UBS Warburg.
Friday's reports showed a surprising 2.1 percent bump in retail sales in March, although most of the increase came from autos, parts and building supplies. Excluding those sectors, retail sales were up just 0.3 percent. Much of the buying may also have been delayed from February, when the nation had colder-than-expected weather.
Still, an improving situation in Iraq along with cheaper oil and gas prices could set the stage for even more solid spending, said economist Gina Martin of Wachovia Securities.
"Consumers continue to show remarkable resiliency in spending patterns. Imagine what they may do when war is over, job gains resume and confidence recovers."
But few economists predict the return of job growth before late this year.
More than 500,000 jobs have been lost in the past three months and more than 2 million since recession officially began in early 2001. The group charged with dating recessions has yet to say that it ended. But even if it did, recent numbers have some pessimists worrying about a double-dip back into the red.
Growth has been anemic: 1.4 percent in the last quarter of 2002. Most analysts expect a similar reading for the first quarter of this year. While positive, that falls short of creating the number of jobs needed by workers.
Adding to corporate headaches has been a growing profit squeeze: Prices paid to producers have been climbing, but a range of factors makes it hard for companies to pass on increases to customers.
That crunch compels many companies to cut costs --- which means jobs, said regional economist Michael Wald of the Bureau of Labor Statistics. "Yes, we assume that companies up to this point have been using higher productivity and cost-cutting to help their margins, rather than pass the increases to consumers."
Stronger signs from the economy could spur hiring.
But of seven indicators tracked by the Economy Cycle Research Institute, four deteriorated and three rose this week.
One key component --- the stock market --- has not produced its expected postwar surge, a sign that investors know risks still abound, said economist Campbell Harvey of Duke University. "Even though the war may soon be over, the problem is a longer-term problem. If this were clearly over, you'd expect the market to jump a thousand points."
Risk-taking relies on more than just numbers. It depends on what economist John Maynard Keynes called "animal spirits" --- and the recovery depends on re-emergence of that intangible, Kasriel said.
"The animal spirits are pretty much in hibernation right now," he said.
Optimists say those spirits will emerge gradually through this year, leading to a solid recovery. Kasriel said he shares the consensus view but only if two things happen: the Federal Reserve cuts already-low short-term interest rates and Congress passes a large package to stimulate the economy.
"I think this year is still pretty dicey, but the foundation may be there for a better 2004," he said. "Hope springs eternal."
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