Over the past seven months I have been very bullish on the economy and have raised my GDP estimates on several occasions. The improvement drama has played out exactly according to the script: Housing is stabilizing, manufacturers are increasing production and slowly rebuilding inventories, and exports are marching upward. While overall consumer spending has shown new life, the improvements have proceeded at a pace that can charitably be described as glacial, erratic, and hesitant. The improvement has been slower than I anticipated, but stronger exports have helped offset some of the disappointing results.Overall, the economy's performance has amounted to a real turnaround story. We moved from GDP declining by more than 6% during the March quarter, to growth approaching 3% during the September quarter. As recently as April, the consensus forecast for September was 0.4%, with many economists anticipating a decline. We have come a long way fast. However, I am paring some of my short-term forecasts. I would be a bit suspicious of a market that has come so far, so fast, especially since the economy is moving into a stage that is more difficult to predict.

Low-Hanging Manufacturing Fruit Has Been Picked
Some of the low-hanging fruit that has fueled this recent economic growth has long since been plucked. At the end of 2008, many manufacturers cut production levels to well below already-depressed sales, exacerbating economic results. During the second and third quarters of 2009 manufacturers really had no choice but to raise production back to at least replacement levels.

This is just aligning sales and production. It is not restocking, as some are characterizing it, since inventory levels are still declining. For one month during the recession, auto production was half of already-depressed sales levels. Over the last six months, auto production has risen dramatically, helping drive up a lot of my indicators and GDP numbers. As early as November, auto production, sales, and employment will be in pretty close alignment for the first time this year.

Any more improvement in auto production and employment will have to come from real end-user demand. Auto sales still have plenty of potential upside, as last month's sales were a measly 10.6 million units (on a seasonally adjusted annual rate basis) compared with 14 million to 18 million during more halcyon times. Similarly, our technology team has cautioned that a lot of the strong semiconductor results during the second and third quarters were driven by inventory rebuilding and not end-user demand. While partially company specific, poor results from Dell (DELL) this week confirm some of those fears.

Government Spending, Help or Hurt?
I am also increasingly concerned that federal government actions are hurting the economy much more than they are helping. In the latest example, Congress thought it had extended unemployment benefits with a bill passed several weeks ago. It turns out that the extension was based on another bill that was scheduled to expire. Now they are going to have to go back and fix that, potentially delaying benefit payments in January for some recipients.

This one is relatively easy to fix, but the highway bill has turned into a real debacle. Baseline highway spending is based on a very large, five-year appropriation.