What a Week: Uncertainty Rises

The weekly gains were cemented Friday in the wake of raised earnings guidance by Merck (MRK Quote) and McDonald's (MCD Quote), as well as upbeat comments about sales from Cisco (CSCO Quote).

In terms of growth, the Fed says "recent developments in the subprime mortgage market suggested that downside risks relative to the expectation of moderate growth had increased." These risks included more sluggish-than-expected business spending trends in addition to housing-related woes. On inflation the Fed says, "recent readings on inflation and productivity growth, along with higher energy prices, had increased the odds that inflation would fail to moderate as expected."

Economists responded by likening the economy's path to walking on thin ice or traversing a tightrope. Under the ice, or the tightrope lies either recession swamp or the quicksand of inflation.

Several economists revised down their outlook for economic growth for the first quarter this week on the heels of the continuing weakness in housing; lackluster business spending; and a less-robust-than expected ISM services report.

The International Monetary Fund and the Blue Chip Economic panel of forecasters both cut their U.S. forecasts this week. The IMF cut the U.S. 2007 forecast to 2.2% from 2.9%, while the Blue Chip panel cut its forecast to 2.3% for the year, down from its 2.5% estimate in March.

Both site capital spending weakness and housing as key factors. Goldman Sachs economic research team writes that its 2% GDP estimate seems a "mite high," but adds that reports on trade, inventories and retail sales could swing their estimate sharply in either direction.