Is the economy poised for a recovery, as the stock market seems to expect? Or are we in for another few more quarters of recession and/or slow growth? In this week's letter we take a look at consumer spending, inflation, and other data to see if we can find a clue or two to give us an idea of the direction of the economy. There is a lot of data, so let's jump right in. (Media note: Right now I am slated to be on Kudlow and Company next Wednesday.)

Many commentators, looking for a bullish lifeline, have pointed to the fact that retail sales grew in April by 1.8% over this time last year. But that is truly grasping at straws. Just last November they were growing at 6% year over year and have been dropping relentlessly for the last six months. And as good friend and data maven Greg Weldon points out, retail sales last November were 1.3% over inflation and now are a negative 2.1% below inflation. Retail sales are clearly headed down. (www.weldononline.com, a must-read for those who need in-depth analysis of all things and data economic)

But there was growth. Gasoline sales were up 16.3%. And food sales were up 6.1%. 77% of the increase in retail sales this year has been from increases in food and gas sales. If you take out food and gas, retail sales are down by about 2% in the last three months.

Is the economy slowing down or is it getting ready to go on a new tear? Judging by the run-up in the Dow, the answer is a major turnaround for the economy in the last half of the year, from the close-to-recession numbers of the first quarter. So, what has happened to my forecast of a slowdown or minor recession? This week we look at some hidden problems in the employment data, analyze retail sales and consumer spending, and speculate about the last half of the year. And we also look at how the dollar is doing, inflation, foreign reserves, and more. And you have got to hear the story about a US government official going to Beijing asking them to buy US mortgages. Seriously. You can't make this stuff up. There is a lot of interesting ground to cover, so let's jump in

First, let's look at the good news. Given the increase in inventories, the rise of all the manufacturing surveys, and a smaller trade deficit, most economists think that GDP for this second quarter will be in the 3% range. Given that first-quarter growth was an anemic 0.6%, this will give us an average for the first half of less than 2%, which is more or less the return of Muddle Through I predicted at the beginning of the year. Most of the growth was technical in nature, coming from a drop in the trade deficit and a significant rise in inventories. As we will note below, retail sales are not all that strong, which may help partially explain the rise in inventories.

The average Blue Chip economist is pegging the US economy to grow in a very robust 3% range for the last half of the year. Manufacturing surveys suggest that the economy is quite strong and are in the territory normally associated with 3% growth. Employment numbers came in surprisingly robust this week, and Wal-Mart had better sales than expected, even if they were weak. So, the market decided to party like its 1999.

The stock market liked both the retail sales and the inflation numbers that were released over the last two days, with the Dow posting successive all-time highs. This week we look behind the headlines and a little deeper into those numbers to see if there is some justification for the exuberance, as well as offer some thoughts on valuation and the recent meeting of the Fed. And I know it will shock you that once again there is a change in the way the government collects its data. It should make for an interesting letter, so let's jump in.

It is getting lonelier to be in the bearish camp. I noted this morning on CNBC that Mark Haines introduced good friend David Kotok of Cumberland Advisors as a former perma-bear. Last summer, David invited me to his rather famous Shadow Fed fishing weekend in Maine, where economists, as well as money managers, some press, and the occasional official figures get together to fish, eat, drink, and talk economics. A very eclectic group by any standard. I took my 12-year-old son Trey and we had a blast. In fact, I was instructed by Trey as we left to be nice to David so we could get invited again.

One of my favorite cartoons of all time is that of a very scrawny mouse caught out in an open field with a rather large hawk swooping down on it. There is no place to run, no place to hide. All the mouse can do is face the hawk and give him the bird, so to speak. The caption runs something like, "In the face of total disaster the only appropriate response is utter defiance."

And while the economic data is not a total disaster, it has not been good this week. Yet the response of investors everywhere is defiance, or at the very least serious nonchalance.

Recession possibilities? "What recession? I spit on your talk of recession." They continue to assume that things will turn out much better than merely OK. All manner of investments are priced for perfection, perfection being defined as growth slowing enough to take out inflation risk yet not enough to hurt the ever upward rise of corporate profits. Goldilocks is the name of the game.