Leading Economic Indicators

Shorter Term
Both the weekly and monthly lead indicators I follow have recovered smartly since late summer -
early autumn 2010 and suggest faster but still moderate growth for the economy ahead. The
momentum of improvement for the indicators has been very strong. This pace of improvement can
continue for a while, but some decay in the rate of progress is likely before too long in time. I
mention this not because the economic recovery would be imperiled, but because the stock market
has been exceptionally attuned to the momentum of progress of the leading indicators. Thus, when
the slowdown comes, the market will at least pause.

Some current measures of economic activity such as the ISM report on manufacturing are showing
broad strength only seen about 5% of the time over the past 25 years. That fact should help you
keep the promise of continued economic recovery and its pace in perspective.

Looking toward mid 2011, there is a critical issue looming. The Fed, after a hiatus of several
weeks, has resumed the QE2 program and is now on plan to complete adding $600 bil. of
monetary liquidity to the economy through 6/30/11. My guess is that if private sector credit demand
does not finally begin to accelerate meaningfully, Bernanke will want to continue the QE program
beyond mid June. If this situation eventuates, there will be a big hue and cry from several
different quarters that the Fed is being reckless, and there could be a nasty political fight. but,
the hard truth is that without liquidity growth, be it money or credit inspired, the evidence of the
past century is that the economy will sink. The Fed's QE programs have been the very backbone of
the economic recovery over the past two years and have provided the confidence needed to
generate the cyclical bull market in stocks.

Longer Term Indicators
In sum, the longer lead time economic indicators are solidly positive for now. The Fed is providing
liquidity support, the real wage is growing, the FICA tax has been cut by 2%, short rates are at the
minimum, the yield curve is nicely positively sloped and the economy is miles and miles away
from a classic cyclical overheat. The one negative is that the price of oil has crossed a threshold
where it will pose a stronger headwind to growth.

There are a couple of important factors to keep in mind re: the longer term leading indicators:

***** The issue of liquidity growth must be resolved favorably by mid year 2011.

***** With 2012 a national election year, there will be pressure to extend the one year FICA tax
           reduction unless the economy is growing strongly enough to produce a substantial and firm
           decline of the unemployment rate. Otherwise, emerging fiscal drag could tinge the economic
           outlook for 2012. Ditto any grand scheme to slice the federal budget deficit before the
           economic expansion is clearly self-sustaining.