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Farrell: The Talk Is Upbeat, But...

There were any number of optimistic statements made last week.

The G-7 finance ministers and central bankers said in a statement that "the pace of decline in our economies has slowed and some signs of stabilization are emerging." Treasury Secretary Timothy Geithner said, "There are signs that the pace of deterioration in economic activity and trade flows has eased." Both Geithner and the G-7 leaders warned that what they see are encouraging signs but warned downside risks are still present.

The relatively optimistic pronouncements came despite the United Kingdom's worst economic dive in thirty years (first-quarter economic output shrank by 1.9% when compared to the fourth quarter), and Spain's unemployment rate jumped to 17.3% at the end of March from 13.9% in December 2008.

Despite that dismal news, a composite purchasing managers index which covers both services and manufacturing in the Eurozone showed the biggest monthly rise in March since the survey began in 1998. It's not positive yet but does show the slowest rate of decline in many months. Erik Neilsen, European economist at Goldman Sachs, was prompted to say, "We are through the deepest in terms of economic contraction." Chris Williamson, Chief Economist at Markit, feels that forecasts for Eurozone growth rates might soon have to be revised up. He was motivated in part by an unexpected strong revival in French business confidence. (Remember, the UK is not part of the Eurozone.)

A few industrial leaders in the U.S. had some relatively optimistic statements. AutoNation's Chairman and CEO Mike Jackson said he expects "very gradual" improvement in new vehicle sales in the second quarter. EMC Corp. reported a 20% decline in first quarter net income. But Joseph Tucci, CEO of the company, is another in the list of technology "chiefs" to say they see the bottom, and Tucci expects some pick up in the second half of the year. I think Jackson will be proven right especially if the TALF Program were to gain any traction.

While banks in the U.S. are going through the stress test, a couple of European banks provided fresh evidence of a bank recovery. Credit Suisse Group of Switzerland reported a better-than-expected profit, and Barclay's stated the first quarter of 2009 was running strongly ahead of the same period last year. Deutsche Bank of Germany is widely expected to report a profitable quarter this Tuesday, reversing the $6 billion loss of last year's fourth quarter. Also, the IFO Index showed rising business sentiment in Germany, and Chinese officials have reiterated their expectation that 8%-plus growth will soon resume. Stress test results in the U.S. are going to be announced starting May 4, but there is still no clarity about who will say what and when. My partner, Carole Berger, will be all over this in the coming week and will be reporting back to you.

Last week, orders for big ticket U.S. manufactured goods fell 0.8% in March, which is a relatively small drop. If taken by itself, this indicates the economy's pace of decline is easing. If you want to be optimistic, the slower decline does give hope that the economy will halt its contraction in a few months. Supporting that idea was a report that capital spending rose for the second straight month, and that hasn't happened in quite some time.

The current recession that started in December 2007 is already the longest since the Great Depression. Figure the consumer is going to be cautious for quite some time. It's, therefore, very important that durable goods and capital equipment orders first stabilize then grow if the economy is to make any recovery.

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