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Optimistic companies at odds with statistics

By Emily Kaiser
/ Source: Reuters

Wall Street and the U.S. government statisticians seem to have very different views on the state of the economy.

Earnings expectations have risen since October for companies in the Standard & Poor's 500 index of big businesses, according to Thomson Reuters data. Lofty stock market indexes reflect that optimism.

Private surveys of manufacturers and small businesses show both confidence and hiring intentions improving.

Food companies and clothing retailers are pushing through price increases to try to offset rising commodity costs, a bold bet that consumer spending will be strong enough to accept higher prices.

Yet the government's most closely watched economic indicators — employment and gross domestic product — still show frustratingly sluggish growth.

Steven Ricchiuto, chief economist for Mizuho Securities USA, said one reason for the disconnect between Wall Street and the government data is where companies are making their money.

"Part of it is global versus domestic. If I'm doing well in my foreign business and that's driving up my profitability ... then I'm a happy camper," Ricchiuto said.

The flip side is that many companies relying on domestic consumption are struggling, particularly services businesses such as restaurants, movie theaters or hair salons that have taken a hit as consumers pull back on discretionary spending.

Earnings results this week from some of the world's biggest retailers will show just how well they managed costs — and consumer restraint — during the holiday shopping season.

Expectations are low for Wal-Mart, which is due to report its quarterly results on Tuesday. It has posted six consecutive declines in quarterly sales at its U.S. discount stores.

Reports from Home Depot, Lowe's and Sears will give insight into homeowners' spending, an important measure when the housing market remains one of the biggest trouble spots for the U.S. economy.

The S&P Case-Shiller report on house prices, slated for release on Tuesday, is expected to show prices fell yet again in December, according to a Reuters poll. A separate report on January existing home sales, coming a day later, is also expected to look weak.

Those retail reports merit close scrutiny for clues on both consumer spending and inflation. It is no secret that commodity-sensitive companies are feeling the pinch from rising costs and are keen to share some of the burden with shoppers.

Campbell Soup said on Friday it faced rising costs for grains, oils, sweeteners and steel cans, and expected "better pricing" in the second half of the year. Many other companies have raised prices or found other ways to cut costs, perhaps by substituting cheaper fabrics for cotton or reducing the amount of food per package.

Price pressures are beginning to show up in rising "core" inflation, which excludes food and energy prices. This has fueled some concern among economists and investors that price pressures are building too fast and will ultimately warrant Federal Reserve action.

Dean Maki, an economist with Barclays Capital in New York, raised his 2011 CPI forecast on Friday to 2.3 percent from 1.8 percent, with his projection for core inflation rising to 1.3 percent, up from 1.1 percent.

Investors will have a chance to hear from a half-dozen Fed officials this week, and will be listening for any indication that policymakers are reconsidering a plan to buy $600 billion in assets to support the economic recovery.

Maki dismisses the view that the Fed will have to raise interest rates sooner than expected in order to tamp down price pressures. Even if core inflation hit his raised target, it would still be below the Fed's perceived comfort zone, and with unemployment at 9 percent the economy has plenty of slack.

"We believe the Fed welcomes the firming inflation backdrop," Maki wrote in a note to clients.