A casual observer glancing at today's report on first-quarter gross domestic product might be under the impression that the U.S. economy is just emerging from recession.
Why? Because the strength in the report came from the usual cyclical leaders: durable goods purchases (up 8.1 percent) and housing (up 12.6 percent). These are the sectors that usually lead us out of recession because they are interest-rate sensitive. Interest rates have been at rock bottom levels for more than four years, and now the effect is kicking in?
Housing is easy to understand. A huge misallocation of capital into residential real estate left lenders correcting for earlier mistakes and homeowners owing more than their homes were worth. That market has started its recovery over the last year, taking baby steps compared with the huge decline.
Consumers suffering from a debt hangover were in no position to take on more. The household balance sheet is in better shape now. The debt service burden, or the ratio of debt payments to disposable personal income, is at its lowest level since the start of the data series in 1980. A good part of that is the result of historically low interest rates.
There were some other interesting tidbits in today's report:
Private GDP rose 4 percent in the first quarter following a 2.1 percent increase in the fourth quarter. Private final domestic demand, which is domestic demand for goods and services minus government, rose 3.2 percent in the first quarter versus a 3.5 percent increase in the fourth. The obsession with the fiscal cliff, it seems, was everywhere except in the data. These measures provide some hope that the private sector is on a sustainable growth path, a notion challenged by recent economic reports.
Overall, real GDP rose a less-than-expected 2.5 percent as defense spending fell 11.5 percent following a 22.1 percent plunge in the previous quarter. Together it was the biggest decline since the 1954 demobilization after the Korean War.
Bottom line: There's still a lot of room for improvement and hurdles ahead. But there's also a ray of hope that that the cyclical sectors will start to do what they always do -- pull the rest of the economy along.
(Caroline Baum is a Bloomberg View columnist. Follow her on Twitter.)