The Dow is ratcheting upward somewhat steadily toward the 13,000 mark while growth in gross domestic product is virtually flat and consumer confidence is falling. Some retailers report decent results. Others report miserable results. Profits for some corporations are surprisingly strong. Profits for others are less bad than expected but horrible by any standard. The housing industry and all associated industries are in the doldrums, yet the unemployment rate hovers around an historically attractive 5.0%.

Given such conflicting news and information flows, there is an extensive debate underway about the status and prognosis for the U.S. economy. Some claim we’re in the midst of a recession but do not yet have the data to prove it. Others scoff at such assertions and point out that the worst is behind us – but do not yet have the data to prove it.

Then we read repeatedly about the depth and duration of a recession, if, in fact, the U.S. economy is in a recession. One group contends a recession will be long and deep. Another anticipates it will be short and shallow – should the economy slide into recession.

So how do we make any sense of these conflicting signals and opinions? One approach is to keep a close watch on the monthly employment numbers and block out all other noise. In each of the last four months, employment has fallen, i.e., the number of people employed in the U.S. economy has decreased four months in a row. Further, weak or declining employment usually translates to weak or declining growth in weekly pay – which has been below the inflation rate over the past two months. Relatively flat growth in pay translates to relatively flat growth in retail sales, precisely what the U.S. economy presently faces. And relatively flat growth in retail sales translates to relative flat growth in corporate profits, which ultimately feeds back to, and impacts, stock prices.

Unfortunately, there is no financial bubble on the horizon to bail out the consumer and, therefore, to bail out retail sales and, therefore, to bail out the economy – in large part because of the continuing free-fall in housing prices and the associated ripple effects throughout the economy. It all comes back to jobs, job creation, pay and disposable income, and consumer buying power.

So watch the employment numbers very carefully. The next report on employment will be released on June 6. If the employment numbers are up, then we can breathe a slight sigh of relief. But if they’re down, then we may be in for the longer haul.

On any one day, the stock market may be soaring in spite of depressing financial and economic news…or vice versa. For example, on a day in which stocks were pushing higher on all exchanges, the major business headlines focused on the following issues:

• Toyota reports a sharp drop in first quarter profits and expects its first profit decrease in seven years when 2008 plays out.
• Oil holds steady around $124 dollars a barrel.
• Retailers reported better than expected results.
• Cablevision’s first quarter loss increases.
• Jobless claims fall sharply.
• The European Community Bank and the Bank of England keep interest rates steady.

What does all of this mean? The information about Toyota, oil prices, and Cablevision all suggests tougher times. The information about retail spending, jobless claims, and European interest rates all suggest better times – or at least encouraging news.

The fine print helps a bit. Toyota’s profit hiccup relates largely to events in the U.S. market, where sales declined in the first quarter in spite of a consumer shift to more fuel efficient vehicles. The sales decline provides further evidence that the U.S. consumer is pulling back from big-ticket items in face of tougher economic times. In addition, the retail results reflect a shift in consumer focus to discounters in attempts to save money in view of rising food and gasoline prices. Wal-Mart, Costco, and Target all did well in April, while most main stream retailers, such as J.C. Penney, Limited Brands, Gap, and Nordstrom, reported decreases in same-store sales.

With oil hovering around $124 a barrel, the prognosis for prices at the pump remains ominous, which feeds into consumer spending restraint and reluctance.

Cablevision’s loss came from derivative contracts and not from basic operations. On the one hand, that is encouraging news. On the other, it is discouraging news, illustrating that the long arm of derivatives may leave no company untouched.

Even though jobless claims fell by 18,000, the number of claims remains roughly on par with the number of claims at the point of the last recession in March 2001.

Finally, the inaction on the part of the European Central Bank and the Bank of England reflects a pressing concern with inflationary pressures that appear more potentially severe at the moment than weakness in the European economies, which would be exacerbated by any decrease in domestic interest rates. Economic weakness is apparent but so, too, is the emerging force of inflationary pressures.

So what do we watch? If the economy drives stock prices, in the final analysis, then the better indicator of where we’re headed is information about the underlying economy.