While today’s reading is encouraging, we have to note that this progress follows the weak report for March; those declines we attributed, in part, to earlier, unseasonal weather and the distortions that created with the following “payback” when more normal temperatures returned (construction materials and utility output were heavily affected.) The latest data show that these weather-related effects may be over, and that production is returning to a healthier, more positive, long-term trend.

The weather also made for some complicated patterns in the construction market. Data on housing starts and permits for April, also released this morning, were mixed, with a 2.6% increase in starts and a 7% decline in permits; readings for both sets of data in March were revised upward. At best, home building remains checked. We see some stabilization, but hardly any momentum as we head into late spring and summer; if anything, the decline in permit requests suggests that construction will not accelerate soon. The composition of the data is also mixed. In April, single-family home starts increased 2.3 percent; starts for multi-family homes advanced 4.3 percent, but multi-family permits fell more than 20 percent. While the multifamily category shows higher volatility and accounts for a smaller share of overall construction activity, this has been the area where stronger gains have been posted in previous months, in-line with a trend away from home ownership and towards renting. April data appear to contradict this recent pattern.  We’ll watch next month to better understand if this is a temporary blip, as we suspect, or a broader shift.

Bottom Line: As the spring progresses, we are leaving behind some weather-related distortions in the economy, so data are returning to normal trends; the economy continues to show signs of improvement, especially in the manufacturing sector, but it is still a long way to show any significant healing in housing, despite the recent stabilization at relatively low levels of activity. Today’s data are consistent with moderate economic growth.

Retail sales also rose at a more tepid pace in April, adding just 0.1% during the month, a sharp slowdown from the 0.8% gain in March. Much of the slowdown was driven by a payback to unseasonably warm weather earlier this year. The biggest declines were posted in building materials, garden equipment, apparel stores and department store sales. We have essentially already bought our spring apparel. The surprise came in gas station sales, which declined less than expected but are likely to decline again in May.

Separately, the Empire State Manufacturing survey performed better, accelerating between March and April more than many expected. Much of this was built on previous gains, however, with shipments soaring and orders increasing at a more moderate pace.

Bottom Line: The U.S. economy is performing pretty much in line with expectations, slowing and cooling a bit on the retail front in the wake of unseasonably warm winter weather; business investment is picking up a bit from the negligible pace of the first quarter. The net result is that we continue to muddle along.

Pipeline inflation also moderated on those lower energy prices. This is something that the Federal Reserve has been predicting; it should spill over into consumer inflation as well.

Bottom Line: The energy push on inflation is playing out. This will give the Fed the flexibility to keep monetary policy easy as we move into the summer.

Separately, import prices plummeted 0.5%, primarily on lower oil prices. This will provide some comfort for the Federal Reserve, which has consistently argued that rising oil prices were transitory and that inflation would abate as we moved into 2012.

Finally, jobless claims fell to 367,000 in the most recent week, with the number of people receiving benefits at the  lowest level since 2008. This continues the trend we saw last week and is consistent with a moderate bounce back in employment in May. It appears that the seasonal distortions we saw earlier in the year are finally playing out.

Bottom Line: The books on the first quarter are closing and it appears growth was even weaker than the initial 2.2% report. Moving forward, much will depend on how we are affected by instability in Europe and concerns that China is heading for a hard instead of a soft landing.

The reason for this spike in volatility and uncertainty is electoral politics.  A weekend of elections resulted in few conclusions but a number of messy details:

-          In Greece, the government coalition, which is pledged to austerity, failed to achieve a majority, raising the possibility of that new elections will have to be held. 

-          In France, the candidate of the Socialist Party, Francois Hollande, defeated President Nicolas Sarkozy to become the new president; will Hollande strengthen his victory or lose support do in parliamentary elections next month? And how will he be able to fulfill his campaign promises when French finances are in such disarray?

-          In Germany, the defeat of Angela Merkel’s liberal coalition partner in regional elections leaves her government in a slightly weaker position to defend austerity measures.

-          In Italy, elections for local governments showed a loss for former prime minister Silvio Berlusconi’s party, which has supported the current prime minister, Mario Monti, in his efforts to reform government finances.          

European voters sent a loud message of disaffection to the political leaders who have implemented austerity programs in the region. This was most notable in France, where Mr. Hollande campaigned on a promise to stop austerity, increase taxes for the rich, punish the bankers and promote “growth” (whatever that means; we have yet to see a politician willing to “promote misery” ahead of a general election).  Markets were reasonably jittery because while Mr. Hollande has a reputation as a consensus builder, he made no mystery of his determination to break from the European consensus on austerity, so strongly pursued by German Chancellor Merkel. It remains to be seen how Mr. Hollande will promote growth and where he will raise revenues for his strategy. Tax hikes on the rich will not suffice; he is not going to cut spending, and France is hardly in a position to tap debt markets for any grandiose stimulus package without quickly encountering punitive interest rates. We suspect that, sooner rather than later, President Hollande will discover the virtues of pragmatism, by showing a more collaborative approach to Berlin than many envisioned during his campaign, and by implementing less radical spending policies than many in the markets fear. In any case, unless President Hollande pivots to the center, international investors may remain understandably tepid toward France (the CAC index is down 2.8% today).

Things got even more complicated in Greece, where exasperated and exhausted voters cast ballots to punish the centrist coalition government. We find it unsettling, although not completely surprising, that many Greeks turned to extremists.  On the left, the Greek Communist Party, one of the most nostalgic, hardline communist groups left in Europe, took 8.5% of the votes. A similar result brought the neo-Nazi Golden Dawn Party into parliament for the first time. With no majority, the governing coalition will have to broaden its base to form a new national coalition, or we may see another general election in June. In either case, Greece is likely to hold onto its commitment to European partners, but will continue to lack credibility for a long-lasting commitment to stabilization, fiscal correction and structural reform. Not surprisingly, the stock market lost more 10% since last week.

There is one silver lining from these mixed poll results, and the resulting market rout. Political forces hostile to the euro made gains in Greece, but they failed to score a big victory. President Hollande’s socialists are staunch supporters of the European Union and the single currency. So are both major political parties in Germany, and so are the political parties most likely to take over Italy in the general election one year from now. On net, there was little progress made by the political forces (the radical right in France and Germany, the radical left in Italy) that aim to end the common currency and dissolve the European Union. In Paris, Berlin and Rome, the political commitment to the European unification project and to the euro is now stronger, not weaker. Those who expected recent elections  to take us closer to the final days of the euro have, once again, made the wrong bet.

Manufacturing activity remained strong, but showed some signs of moderating. This is in line with other manufacturing reports we have seen, particularly the recent drop in durable goods orders. Essentially, manufacturers have already restocked their inventories in the wake of last year’s tsunami and are now just building to sell. This also showed up in the transportation and warehousing numbers with fewer jobs.

Nursing care employment fell. This probably represents a shift, as the long-term unemployed tend to use their down time to help relatives who need additional care.

On the brighter side, we saw temporary employment bounce back, suggesting more permanent hiring on the horizon. March revisions to the upside suggest that the payback for early warm weather may not be as large and persistent as feared.

Separately, the unemployment rate fell from 8.2% in March to 8.1% in April. This is the lowest level on the unemployment rate since September 2009. Unfortunately, much of that “improvement” may be attributed to a drop in the number of people employed. Moreover, the number of those classified as unemployed declined, as extensions to unemployment insurance expired in nine states in April. This trend will likely intensify as more workers lose their unemployment insurance.

Bottom Line: Payroll employment has improved at an average pace of a little more than 200,000 jobs per month since the beginning of the year. We should return closer to that average as we move into summer. Concerns are the persistence of long-term unemployment, and how many of those workers are now losing their insurance and discontinuing their job searches.

Separately, productivity growth declined as labor costs edged up during the first quarter. This should not be a surprise given the comeback in employment we saw, particularly in the seasonally sensitive sectors, (like lawn mowing), which don’t tend to show a lot of productivity gains.

Productivity growth in the manufacturing sector continued to rise at a decent pace and more than offset the costs associated with rising wages. Productivity growth is expected to bounce back in the second quarter as many of the seasonal distortions of the first quarter start to play out.

Bottom Line: The recovery remains extremely uneven, but barring a significant worsening of the crisis in Europe, appears to be more durable than it was a year ago. The real challenge will come near year-end, when the lame duck Congress has to deal with expiring tax cuts and mandatory spending cuts.

The shortfall occurred in the manufacturing and construction sectors. This partlly reflects the giveback to unseasonably warm, winter weather earlier in the year. It also mirrors some of the more recent manufacturing data, which show some slowdown after manufacturers restocked inventories in the wake of Japan’s tsunami and a slowdown in global growth.

Bottom Line:  Payroll employment has clearly slowed and is likely to come in the 122,000 range for April, marking a sharp slowdown from the pace of the first quarter of 2012. One should really average the first four months of the year to get a better sense of where underlying employment growth is, which is better than it was last summer but still not enough to bring down unemployment significantly, especially for the long-term unemployed.

Other bright spots appeared in the private sector in the lodging, office and manufacturing areas. Many plants that were idled during the recession are now being expanded, while new investment in the auto industry is coming on line.

This is consistent with the Institute for Supply Management (ISM) index of manufacturing activity, which rose to 54.8 in April from 53.4 in March. Moreover, gains were much more broadly based than we saw in the Chicago ISM, as employment accelerated along with production. The only red flag in the report was inventories, now being drawn down, and the backlog of orders, which appears to be dissipating.

Bottom Line: The business sector is still extremely cautious in its willingness to make big bets on the future – understandable, given the uncertainty over orders. This likely reflects a slowdown in global demand and will be watched closely, especially by the Federal Reserve, to determine the underlying resilience of the expansion.

In general, Chicago manufacturers remain relatively optimistic for the summer and expect the soft spot that we are experiencing to be temporary. This would be consistent with broader measures of the economy, which show that unseasonably mild, winter weather boosted growth earlier and that we are now experiencing some payback for those gains. Underlying growth trends are somewhere in the middle.

Indeed, employment was one of the bright spots in the report, with hiring picking up faster than we saw in March, as more idled capacity was brought back on line. One would also assume that productivity suffered somewhat during the month.

Prices paid increased at a slower pace, no doubt reflecting the outsized role the oil price plays in determining costs in the manufacturing sector. So far, we have seen very little pass-through of higher oil prices to broader measures of inflation. It is still, however, a concern for the Federal Reserve in terms of both inflation and the drag it could put on demand.