Maybe, just maybe, the consumer is starting to feel like dipping their toe into the water. It seems as if the consumer is finally starting to feel confident enough about the current path of the American economy to start to spend some money and get the ball rolling. Today both the retail sales number from November and the University of Michigan consumer sentiment number from early December showed a whole lot of promise.

Retail sales rose by 1.3% in the month of November, more than double the estimate that economists were looking for from the month. A strong Black Friday and Cyber Monday certainly contributed to the report, which showed that consumers are no longer feeling as if they shouldn’t spend at all. Clearly discounting at retailers helped bring consumers in, but in the past even deep discounts hadn’t been enough to make consumers make the purchase.

Consumer sentiment jumped to 73.4 in early December from a reading of just 67.4 in November. This is the highest level of consumer confidence in 3 months. Most analysts believe that the slight improve in the labor market as well as promotions and discounting for holiday sales has gotten consumers into a better mood in the last month.

Consumer confidence and retail sales don’t always move in the same direction, but when they are both moving upward it is certainly a strong positive for the overall economy. Consumers account for 70% of the American economy and without strong consumer spending the American economy simply cannot thrive. The current upswing isn’t yet a confirmed trend, rather it has the potential to be the start of something big. The real key going forward will be whether the labor market can continue to improve, which would in turn allow consumers to continue to feel more comfortable making purchases and stimulate the entire economy.

It’s a fundamental lesson in economics and a lesson that all consumers and investors should understand. Even if we are in the midst of a healthy recovery it will not be a straight line up. Rather an economic recovery always has plenty of rough spots in it where it may still feel like we are in a recession. Don’t be alarmed the first time the stock market has a pretty strong move to the downside or the first time some of the economic numbers don’t show a very optimistic picture of the economy. An economic recovery is typically full of times where consumers and analysts alike question whether the recovery is real or not.

The recession we have been in was a very deep recession that will take a long time to recover from. The stock market has certainly priced in the fact that a recovery is on its way, but it may not have factored in the economic bumps in the road that are sure to come. Since September and October are typically two of the worst months of the year for the stock market, an investor should probably tread carefully with the stock market at these levels. There will certainly be some pullbacks where you can find stocks at a better price.

It’s fine to be optimistic about the outlook of the economy for your country and the world as a whole, but it is definitely wise to be realistic about the recovery. When there has been such a powerful global recession where so many have lost their jobs and the strength of the consumer has been compromised so badly, you must realize that it will take time to heal those wounds. The recovery may well be taking place now, but don’t expect a straight line up for the economy or the stock market!

This morning the government released their first estimate for the Gross Domestic Product, or GDP, from the fourth quarter of 2008. At first glance the report doesn’t appear quite as bad as some first thought it would be, but one should be cautious to read too much into it. The initial advance 4th quarter GDP figure shows GDP falling by 3.8%. That is certainly a very poor number, in fact is the worst since 1982, but analysts had been projecting a drop of 5.5%. Having said that, the government is likely to revise the numbers in the future and that 3.8% may end up turning into 4% or more on the downside.

The worst news is that it is very likely that the first quarter GDP number for 2009 will be much worse than the fourth quarter in 2008. Inventory which helped hold the number up a little in late 2008 has had to be gotten rid of and companies are laying off workers at a faster pace now than they have at any other point in this recession. The writing is certainly on the wall for things to get worse instead of better with the next couple of GDP reports from the government.

Another thing for individuals and investors to remember is that these GDP figures are more backwards looking than most economic reports, so they mean less to the stock market and the current economic state. The monthly employment data as well as consumer confidence readings and retail sales numbers all do a better job of capturing a more recent snapshot of how things are in the American economy. In my opinion none of the numbers are as important as the employment report, because as long as companies are increasing the amount of layoffs the consumer won’t be in a good position to help the economy turnaround. The bottom line; watch the GDP number, but remember it is not a forward indicator at all.