The government reported today thatU.S.gross domestic product increased at a 1.3% annual rate in the first quarter, which is the weakest since the first quarter of 2003, following the recession of 2002. The report will be revised in each of the next two months, but it shows some worrisome trends. Home construction continued to decline and the trade deficit grew. Inflation gauges in the report surged to their highest since 1991.

Equal Parts Capital, Free Trade, Information, Oil, and a Dose of Cooperation to Hold It All Together What is the greatest threat to the world economy? Is it a slowing US economy, inflation, protectionism ,China’s explosive and unchecked growth, a financial or liquidity crisis, global warming, terrorism, or energy? While any one of these and certainly any combination could cripple the unprecedented economic advances we enjoy today, the great barometers, the stock and bond markets remain relatively unfazed. 

The mood on Wall Street has been anything but spring-like. For the week, the S&P 500 and Dow Jones Industrials have dropped 1% and the Nasdaq Composite is down 1.3%. Today is the last trading day of the first quarter which will end relatively flat for the major indices. It was shaping up to be a pretty good one until investors got spooked The S&P 500 is up 0.3%, the Nasdaq is up 0.1%, while the Dow is down 0.9%. Thanks to diversification, our returns have fared better.

The big investment news this week is that the Federal Reserve may be transitioning toward lower rates. They dropped the terminology that “additional firming” may be necessary from their policy announcement on Wednesday. However, they maintained that inflation was still their top concern. It means that, in their view, the immediate threat of inflation is low enough that additional interest rate increases are not required. Further, the Philadelphia Fed's survey of professional forecasters found that the expected inflation rate for the coming decade has dropped to 2.35% today from 4% in 1991.

During the past couple of weeks, Mr. Greenspan and others have publicly weighed in with their own views on the economy and possible recession. While Greenspan says he puts the chances of recession at 1 in 3, most economists, including Fed Chair Ben Bernanke, think the economy is in pretty good shape. They think that the chances for recession are generally more remote. While they recognize that weaker mortgage borrowers could have a significant effect on lenders in those markets, most think that the problem will not drag the entire economy into recession.  

We start our day without even thinking about it. We take for granted that the floor will support us when we step out of bed, that clean water will pour on demand from the lavatory spout to brush our teeth, and that hot water for our shower is just moments away. Confidence is defined in numerous ways and indeed changes in the circumstances. Webster defines it as “the state or feeling of trust in or reliance upon another” (person or thing, we could add).

Just a couple of weeks ago it looked as if the economy was going to re-accelerate after only modestly slowing to a respectable 2.5% growth in the fourth quarter. But more economists are now reducing their estimates for growth and saying that fourth quarter GDP will likely be revised downward from 2.5% to 2.0%. In several speeches, Fed governors and district-bank presidents yesterday pared their estimate of economic growth for 2007 to 2.5% - 3%.

Bond and stock investors alike are struggling to find some broad theme on which they can base their investment propositions. A problem is getting too close to the data, which, according to Fed Chair Ben Bernanke is ‘noisy.’ In his testimony before Congress Wednesday and Thursday Mr. Bernanke issued a balanced assessment of the economy with moderate growth and easing inflation. He said that he sees stabilization in the housing sector, and pointed to increasing strength in manufacturing and consumer spending.

The strength of the U.S. economy continues to confound skeptics as well as optimists. The government released it’s first of three estimates on the overall growth of the economy on Wednesday. Even in the face of slumping housing gross domestic product climbed at a seasonally adjusted 3.5% annual rate in the fourth quarter, up from 2% in the third quarter. And even more noteworthy, it grew without inflation. The price index for personal-consumption expenditures posted its biggest drop in 52 years falling .8%. 

Investors have gradually moved away from the notion that the Fed is ready to cut interest rates while some think they may be near raising them. The economy has slowed, but will it continue to slow sufficiently to squeeze out inflation? Sure housing and autos are in the basement. Just yesterday, the National Association of Realtors reported that sales of existing homes in 2006 dropped 8.4%, the biggest droop in about a quarter century according to the WSJ. Also yesterday, Ford reported a staggering net loss of $5.8 billion during the fourth quarter, dragging its shortfall for all of 2006 to $12.7 billion.  General Motors said it would delay filing its fourth quarter and 2006 earnings results as it "will restate its financial statements, primarily due to pre-2002 tax accounting adjustments," according to its statement also in the WSJ.