ANALYSIS OF APRIL CDI BY DR. ROGER SELBERT

Los Angeles - Confirming what we have been forecasting in our CDI reports throughout 2007, the US economy has not been in recession. It is weak - economic growth in 1Q2008 was 0.6% but not collapsing. Same is true of both workers' compensation and consumer spending: each up only slightly, but at least not down. In my view the worst is over; the economy and consumer spending will turn around, perhaps dramatically, by the third and fourth quarters. My reasoning is below.

Of course there is uncertainty among consumers, and that is reflected in our survey of household buying intentions. Again, most telling is the large percentage of households (54%) sitting on the fence, not committing to any major purchases in the next three months, a real wait-and-see posture. (This is actually down slightly from last month, and we will allow ourselves to take that as a positive sign.)

The most recent jobs report produced a smaller than expected decline in corporate employment, an increase of 362,000 in the household survey (the best gain in five months), and an unemployment rate of 4.95% (low by historical standards).

Government rebate checks have begun landing in bank accounts (after rebates were distributed during the 2001 recession, consumer spending increased for nine months). And as we predicted in December 2007, the Fed has cut interest rates yet again.

Home prices have fallen and foreclosures have increased, but they represent a tiny fraction of all houses. In other words, the current drop in consumer confidence is based on perceptions generated more by media (and presidential candidates) than by personal experience.

In our view consumers are waiting for any positive sign to start greater spending again, such as lower oil and gas prices, a stronger stock market, or a stronger housing market. All are indeed in the cards: oil prices will likely go much lower after, if not before, the November 2008 election. There is currently $3.5 trillion sitting in money market funds and with corporate profits (outside financials) up 10% over a year ago, that money will not stay on the sidelines. As for how much further housing prices can fall, consider that the US population of over 300 million will surpass 400 million within 35 years, and it becomes clear that the real question is when the next housing boom starts.

Bear Stearns economist David Malpass expects an economic recovery in coming quarters in response to generally good global growth conditions (record number of people working), low real interest rates in the US and many parts of Asia, low inventories, moderate earnings growth outside of financials, and US consumer resilience.

In support of his contention of consumer resilience he sites moderate jobless claims and liquid household balance sheets, including record money-market balances, near-record financial net worth, and decades of compound gains not counted in the official personal savings rate. He expects to see indicators of recovery in coming months - narrowing credit spreads, a moderate decline in conforming mortgage rates, moderate jobless claims, higher equity prices, revived consumption growth in May and June, and then an increase in home sales and mortgage applications.

New orders at US factories jumped a much stronger than expected 1.4% in March. When the volatile transportation component was stripped out, factory orders had an even healthier increase of 2.2%. Inventories of manufactured goods rose by 0.9%, to the highest level since the Commerce Department began keeping records in 1992. Inventories have increased in 13 of the last 14 months.

Sam Stovall, chief investment strategist at Standard & Poor's, believes the worst is over for stocks. He expects the S&P 500 index of stocks to reach 1,560 by the end of the year, for a gain of 13% from current levels. The Federal Reserve's recent interest rate cuts, expected consumer spending increases from tax rebates, and higher corporate earnings are the reasons for Stovall's bullishness.

In fact, Stovall estimates optimistically that many of the write-downs taken in the financial sector because of the subprime crisis will prove to have been unnecessary, providing an extra boost to stocks.

The Consumer Demand Index (COI) is a nationally representative monthly survey of 1,000 or more US private households that measures consumer purchasing intentions across the range of durable and non-durable goods. Our seven years of historical data show the COI to be an excellent predictor of actual buying behavior. A one-year subscription (12 issues) is now available for the special promotional price of $280. To subscribe or to receive sample issues contact Dr. Roger Selbert [roger@rogerselbert.com].

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