One hallmark of wishful thinking (seems to be a lot of that going around in 2008) is believing that in the short-term when things aren’t immediately worst-case, that it’s okay to ignore all the long-term evidence and say that “the worst is over.”

Case in point:  This week in the housing depression.  With a 25 basis point cut in the Fed rate and employment numbers and first quarter numbers slightly better than expected, we’re seeing signs that people think it’s clear sailing ahead.

The worst-case scenarios just aren’t playing out.

Yes, companies cut jobs again, we learned today, for the fourth straight month. In April, 20,000 jobs were lost, but economists on average expected a loss of 75,000 – some feared more than 100,000 cuts.

What’s more, the unemployment rate dipped from 5.1% to 5%. Most thought it would tick higher.

We’ve had news like this all week. In short, the economy is in bad shape….but it’s simply not as bad as a lot of people are making it out to be.

On Wednesday, an initial reading of the economy in the first quarter showed that the economy grew – not by a lot, but at least it didn’t decline as many feared.

The Chicago PMI, a key gauge of the manufacturing sector, came in a bit higher than forecast, a possible sign that the worst may be over for that troubled industry. And the government reported today that factory orders for March rose 1.4%, much higher than expected.

Finally, the increase in personal spending for April was also a bit better than expected, showing that the consumer isn’t dead.

“We’ve been gradually coming to the conclusion that the economy is in a bottoming phase. The data has been weak but not bas bad as expected. That’s a good scenario and we’re feeling better,” said Joe Balestrino, fixed income market strategist with Federated Investors, a money management firm based in Pittsburgh.

Feeling better?  But why?

The reality behind the GDP numbers are pretty grim, that 0.6% growth rate is only positive overall because of counting all the unsold inventories in stores and in real estate.  Without those, GDP was actually negative.

With the employment numbers, again the only reason they aren’t as bad as they were projected is because of the models indicating 45k new construction jobs…something that’s a clearly faulty assumption.

Home prices are still plummeting, the best indicator yet that we still have a long wat to go before the worst is over.

The Fed is still injecting billions into the financials to keep them solvent.

The Federal Reserve, seeking to prevent a deeper economic slowdown, took another stab at coaxing banks into lending at lower rates.

The Fed boosted its biweekly Term Auction Facility sales of cash to banks by 50 percent to $75 billion and expanded the collateral it takes from bond dealers through loans of Treasury securities. It also raised the amount of dollars it makes available to the European Central Bank and Swiss National Bank through swap lines to a combined $62 billion from $36 billion.

Borrowing costs for banks have risen as much as 0.38 percentage point in the past six weeks, an increase that blunted the impact of the cash injections that began in December. The strains threatened to further impair mortgage markets, worsening an economy where growth has already stalled.

“The world is awash in liquidity, it just isn’t reaching the right financial borrowers,” said Chris Rupkey, chief financial economist at Bank of Tokyo-Mitsubishi UFJ Ltd. in New York. “Today’s action from the central banks is another strong dose of medicine that will help cure what ails the credit markets.”

Fed officials also expanded the collateral they accept under the Term Securities Lending Facility to include AAA rated asset-backed investments. About 95 percent of outstanding student-loan securities are AAA, according to the American Securitization Forum. Democrats in Congress had pushed Chairman Ben S. Bernanke to take student-loan bonds on the central bank’s balance sheet.

Again, all this is smoke and mirrors, doing nothing to stop the avalanche of trillions in derivatives melting down.

Americans are declaring bankruptcy in record numbers.

Bankruptcy filings by U.S. consumers jumped 47.7 percent in April from one year ago as families cope with fallout from the subprime mortgage crisis, the American Bankruptcy Institute said.

The 92,291 bankruptcy filings in April also marked an increase of 7 percent from March, the non-partisan institute said.

“The sharp spike in consumer bankruptcies reflects the growing financial stress faced by American families, saddled with household debt and mortgage woes,” said Samuel Gerdano, executive director of the institute.

“We expect consumer bankruptcies to top 1 million new cases this year.”

For all of 2007, there were 850,912 U.S. bankruptcy filings, up 38 percent from 2006.

The economy is driven by consumer spending.  If consumers are broke, there’s no spending.  Period. Gas prices continue to slow down spending and lower confidence.

Yes, the Dow is back above 13,000.  Which one do YOU honestly think it will hit next, 14,000, or 12,000?

At this point we’re looking for any signs that the worst is over so that we can imagine the problems away.  We’ve hit a lull in the carnage, the eye of the storm.  The worst is still to come.

The descent will just pick up again.

Be prepared.

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