The stock market has been rising for two solid weeks. First-quarter GDP, reported Friday, far from falling into recession was reported at up 2.0 percent. Consumer spending, reported Monday, continues to rise, and the savings rate has even become marginally less negative–up to minus 0.8 percent.

Happy days are here again, right?

Wrong.

The gross domestic product number, first, is subject to substantial revision, and I mean substantial. The average revision between the advance figure (that announced Friday) and the final is 1.3 percent, and the 95 percent confidence level figure is 2.8 percent. This means that when the final figure for first-quarter GDP is in, it has a 5 percent chance of being either more than 4.8 percent or less than minus 0.8 percent. Given the 2.0 percent figure’s moderate dissonance with other March data, I have to believe, even without waving the Bear flag, that the revision is more likely to be down than up.

In any case, when you look at the composition of GDP, the outlook is much less rosy: 105 percent of the increase in GDP was represented by consumer spending, which of course simply means that the consumer was going further into debt in spite of the stock-market induced decline in his net worth. Also, 135 percent of the net increase was also offset by a sharp decline in inventories, meaning sales were greater than production, based on production cutbacks motivated by oversupply. This decline in inventories, while good for reducing oversupply, reduced the overall GDP — in this case from a potential rate of 4.5 percent growth for the quarter.

What that inventory figure actually does is throw doubt on the calculation as a whole — from anecdotal evidence, other economic statistics and above all first-quarter earnings reports, there is no way that the non-inventory part of the economy was growing at 4.5 percent in the first quarter. If it had been, first-quarter corporate earnings would have been sharply up. And from the latest figures I have seen, they were at least 7 percent down.

The inventory decline was offset by a corresponding shrinkage in imports, again good news as it reduces the economy’s distortions except to the extent that the United States has thereby exported its near-recession abroad.

Meanwhile, money supply growth continues to roar ahead. According to last Thursday’s figures, seasonally adjusted M3, the broadest measure of money supply, in the week ending April 16 was up 7.10 percent from six months ago (October 16), an annual growth rate of 14.69 percent that has remained more or less constant for six months, between October and April. With real GDP growth of 2.0 percent, that growth in money supply will accommodate, after a lag of 12-18 months, an inflation rate of 12.69 percent per annum. Ouch!

Skeptics and bulls will respond: So where’s the inflation coming from? After all, the Personal Consumption Expenditure deflator for March was up 0.0 percent, which hardly suggests roaring inflation, and the consumer price index for the month was also up an underwhelming 0.1 percent.

It must however be remembered that inflation does not only include items in the consumer price index, but also asset prices. Stocks have been relatively subdued in the last quarter, even after the last two weeks’ rises, but house sales and house prices haven’t. March new home sales were a torrid 1.02 million annualized pace, the strongest month on record, with the median price of single family homes increasing by 6.5 percent over the previous year. With the Fed having enacted four rate cuts this year, and expected to enact a fifth, the housing market is poised to roar ahead both in terms of quantity and price.

Increasing house prices would at first sight appear to be an unmitigated blessing; after all, they increase consumer net worth and thus make up for any hiccups in that area due to the stock market decline. However, even though housing is not explicitly included in most consumer price statistics, its effect does eventually turn up through higher costs of labor, higher costs of business real estate, higher local taxes, higher land prices and higher construction costs.

Nevertheless, it must be asked, if the wealth lost in the stock market decline is going to be replaced by a housing market bubble, where’s the problem? Overall consumer wealth may remain level or even mildly increasing, and its distribution will be somewhat improved since more poor and middle class people own houses than own stocks. The wealth effect on the economy will be, if anything,. mildly positive in terms of consumer spending.

This would all be fine if productivity had indeed increased during the 1990s to a new, higher level, but as we have exhaustively written, in terms of total factor productivity, it hasn’t. Indeed, the productivity growth rate in the 1990s is slightly below that of the 1980s and well below that of the 1960s. All that has happened is that the exceptional capital investment in the 1996-2000 period has caused a rise in labor productivity. That is not at all the same thing, and it will go into reverse once investment drops off. Equipment and software investment decreased by 2.1 percent in the first quarter after a 3.3 percent decrease in the fourth quarter of 2000; this is the number which generates labor productivity, not non-residential structure investment (up a startling 11.0 percent), which is largely unneeded bull-market shopping malls. Look for a sharply lower increase in labor productivity when this statistic is announced (1st quarter, preliminary) May 8.

The other mechanisms that will bring this happy merry go round to a halt are consumer debt and unemployment. Credit card debt surged at nearly a 20 percent annual rate in February. Look for another nice juicy increase for March when this figure is announced May 7. The progress of the new tighter bankruptcy code through Congress may help lenders in the forthcoming crunch, but it will do nothing for consumer spending or indeed for consumer confidence in general.

First-time jobless claims announced Thursday, surged to 408,000, the highest since October 1992. The unemployment rate last month was still only 4.3 percent, but will probably rise another notch when the April figure is announced May 5. Historically, when the unemployment rate has risen 0.3 percent (as it already has) it has then gone on to rise by at least an extra 1 percent.

So there you have the mechanism that will bring the current euphoria to an end. More people are losing their jobs, unemployment is rising, and consumer credit is soaring. This will cause a decline in consumer spending which, together with the already experienced slump in business investment, will put further pressure on profits. The stock market will resume its decline. And the housing market, finally, will also cease its upward move and go into reverse.

Fed interest rate cuts can affect this, of course. They can prolong the housing boom, further overextend the consumer, and cause consumer prices to start rising at a much faster clip. If Greenspan is aggressive, he should be able to achieve quite an exciting level of inflation even in the consumer price statistic by early 2002.

However, Greenspan can only delay, not avoid, the next leg of my United Press International colleague Ian Campbell’s Lazy W recession. And, as the year winds on, it becomes clearer that the W is likely to be a very lazy one indeed, with the downturn being prolonged, as in Japan, by the need to unwind not just a stock price bubble but now a real estate bubble as well.

Hasta la vista, prosperity. See you in 2010 — if we’re lucky.

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(The Bear’s Lair is a weekly column that is intended to appear each Monday, an appropriately gloomy day of the week. Its rationale is that the proportion of “sell” recommendations put out by Wall Street houses remains far below that of “buy” recommendations. Accordingly, investors have an excess of positive information and very little negative information. The column thus takes the ursine view of life and the market, in the hope that it may be usefully different from what investors see elsewhere.)

This article originally appeared on United Press International.