SERIOUS MONEY:The bulls have returned to Wall Street . . . they were wrong last autumn. They will be wrong again, writes Charlie Fell.

SUMMER ARRIVED early on Wall Street as the protracted losing streak that began last autumn came to an end in April.

Stock prices registered their first monthly gain since last October and the positive price action awoke technical analysts from their slumber as the major indices broke through both their 50 and 100-day moving averages.

Those of a fundamental persuasion joined the party and the sighs of relief reached fever pitch after the release of a positive first-quarter GDP report, which was soon followed by a favourable employment report.

The positive economic surprises caused the bright lights on CNBC to question current monetary policy and to virtually guarantee a hike in interest rates before the year's end. Are they right? It is doubtful.

Economic growth remained in positive territory during the first quarter, albeit anaemic at 0.6 per cent. However, the media pundits are breaking out the champagne prematurely, as the underlying data exhibited significant deterioration and was decidedly uninspiring.

Consumer spending growth slowed to just 1 per cent, the slowest quarterly gain in more than a decade, while expenditures on durable and non-durable goods combined declined at an annual rate of 3 per cent, the weakest performance since the fourth quarter of 1991.

The outlook for consumer spending remains grim given that household wealth has declined for two consecutive quarters, the availability of home equity loans is disappearing, surging energy and food prices are commanding an increasing share of household income, and the labour market is in decline.

Not surprisingly, the University of Michigan's sentiment index has dropped to a 26-year low.

The weakness was not confined to housing and the household sector and spread to the corporate sector as business spending on structures, as well as equipment and software, registered a decline in the first quarter.

The data corroborates the views emanating from the Federal Reserve, which observed at its latest policy meeting that "household and business spending has been subdued", whereas its statement following its meeting in March focused solely on soft consumer spending.

The business sector also experienced what would appear to be an unwanted inventory build during the first quarter without which growth would have dropped into negative territory. Clearly, the liquidation of said inventories will subtract from growth in the second quarter and the Fed's latest Senior Loan Officer Survey notes that "customers' need to finance inventories has declined".

The outlook is hardly encouraging going forward, given that the CEO confidence index dropped to a cycle low in the first quarter, while Standard and Poors reports that the default rate on corporate bonds has climbed notably with as many defaults in the past three months as all of 2007.

Furthermore, the Fed's loan survey observes that a substantial number of banks that experienced weaker loan demand recently "pointed to a decrease in customers' needs to finance investment in plant and equipment".

April's employment report was released just days after the GDP report and the headline numbers suggested that the labour market was not as weak as most has feared, with job losses of just 20,000, well below consensus.

However, a more studied analysis reaches an altogether different conclusion the labour market shows visible signs of continued deterioration.

The Bureau of Labour Statistics (BLS) notes that "the number of persons working part-time for economic reasons increased by 306,000 to 5.2 million" in April and rose by 849,000 year-on-year.

It reports that these workers "indicated that they were working part-time because their hours had been cut back or because they were unable to find a full-time job". This is hardly indicative of an improving jobs market.

Note also that the BLS also reports on individuals who are marginally attached to the labour force, who "wanted and were available for work and had looked for a job sometime in the prior 12 months" but "were not counted as unemployed because they had not searched for work in the four weeks preceding the survey".

The marginally attached amounted to 1.4 million individuals and, if treated as unemployed, the jobless rate would jump from 5 to 5.8 per cent.

The notion that the labour market is not about to reverse course is corroborated by the fact that the headline numbers may overestimate labour market reality due to the BLS's birth- death adjustment, which attempts to account for the net new jobs created by small businesses.

The adjustment is decidedly lagging and consistently overestimates labour market reality during the late stages of an economic expansion.

The most recent adjustment suggests that the net number of jobs created by small businesses amounted to an incredible 267,000 in April, of which 53,000 emanated from the construction and financial sectors.

Perhaps there has been a surge in the number of new debt- collection agencies, all of whom have decided to locate in recently built premises - then again, perhaps not.

The bulls have returned to Wall Street and argue that stocks are set for lift-off as the US economy has avoided recession.

The arguments are feeble as a more thorough analysis suggests that the economy is contracting.

They were wrong last autumn. They will be wrong again once round two of the current bear phase begins.

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