Some economic numbers indicate that things are improving. We think, however, that there remain significant reasons for caution as the economy is still fragile and the consumer suffers from high unemployment and the lack of credit. Much of economic improvements we’ve seen lately have come on the strength of federal backing. It remains to be seen if the economy can maintain the momentum sans government stimulus initiatives.

The latest retail sales for August beat Street estimates as they showed an impressive 2.7 percent monthly bounce. However, if we exclude car and gasoline sales, which got a major boost from the government sponsored cash-for-clunkers program, retail sales were up only 0.6 percent.

 

The New York Federal Reserve’s Empire State survey, which monitors manufacturing activity in New York State, also showed a surprising 7 percent spike, hitting an overall reading of +18.9. That’s the highest mark since November 2007, the final month before the economy officially entered recession. New orders advanced to almost a +20 reading in the month, indicating that demand should be improving. Not all readings were positive, however, as the reading for employment fell to -8.3, marking the first month-to-month decrease since February. So again, while economic trends appear to be headed in the right direction, the mixed signs point to a likely rough recovery.

 

San Francisco Federal Reserve President Janet Yellen expressed a similar view today, saying that recovery is “apt to be tepid.” She warned that the financial system isn’t back to normal yet and further shocks could derail a fragile recovery. She also noted that even economic growth of 3 or 4 percent may be too slow given the number of jobs that need to be created to get Americans back to work, echoing our view that the high unemployment rate remains one of the largest obstacles to a smooth recovery.