The latest economic data not only failed to show the resurgence from a sluggish first quarter that we had expected but also depicted further sluggishness - even weakness - at an intensifying pace.
We still expect an eventual snap-back, to be led by housing sales and consumer purchases of household durables, nondurables, and services. But that seems to be drifting further into the future.
As a result, any thought of a Federal Reserve tightening is put aside for many months, perhaps even for the rest of 1995.
Furthermore, while still a low probability, we must recognize the possibility of a Fed easing in late summer.
Existing-home sales for April were very disappointing. They declined 6.4% for the month, bringing the level back to the selling rates of mid- 1992 when housing sales were only about midway into their cyclical recovery.
Moreover, the number of units available for sale jumped nearly 22%, thereby raising the supply of unsold homes relative to sales to recession levels.
Existing-home sales are very important because they outpace new home sales by 5.75 to 6 times and they must be sold to clear the market and make room for new home sales and starts.
Accordingly, a lot of housing transactions (buys/sells) will have to take place before we can contemplate a pickup in housing starts, a high- multiplier stimulant to the economy.
Furthermore, home sales, even existing-home sales, trigger a wide range of consumer purchases for household goods.
And if people anticipate buying a house, they typically delay purchases of those household goods until the home has been bought.
Thus, a reacceleration of residential construction expenditures and personal consumption expenditures will be delayed several months.
A second disappointing report was on new orders for durable goods in April.
Those orders declined for the third consecutive month by an unusually large amount, 4%. This was the third consecutive monthly decline and, by far, the largest.
Furthermore, the weakness extended to the industrial sector, specifically, nondefense capital goods, nonelectrical machinery, electrical machinery, and primary metals. These had risen earlier.
The just-reported declines reflect a possible pause in the capital equipment boom. Additionally, shipments declined for the first time since October, and unfilled orders declined for the first time since August.
The gathering downward momentum, especially in this sector of the economy that had been strongest, is troubling.
Finally, initial jobless claims rose yet again, and by a fairly large amount. The four-week moving average has risen almost steadily since early in the year and is now at its highest level since October 1992.
It would appear that there is a weakening in the demand for labor.
There is a risk that this weakness could start feeding on itself and evolve into a descending spiral. While we do not expect this to take place, it is something to keep in mind and monitor.
Our view is that consumer finances are in good shape and that incomes are rising, which should lead to renewed spending and a renewal of the expansion.
We are skeptical of the prospect of a monetary easing. As a practical matter, there has already been a substantial degree of de facto easing emanating from the decline in market interest rates, the decline of the dollar over the course of 1995, and the redistribution of ownership of dollar balances from foreign private holders to domestic private holders.
That redistribution is the result of sterilized central bank foreign exchange intervention. Domestic ownership of those balances improves liquidity within the U.S. financial system.
Consequently, in this very fluid environment, we must gauge our outlook on probabilities.
The most likely scenario is no change in monetary policy for many months. An economic snap-back would likely induce renewed restraint but with a two- to three-month lag.
Further weakness along the lines we have already seen - which we doubt will happen - would likely induce the Federal Reserve to ease, but probably not until August. Mr. Sherman is director of research at M.A. Schapiro & Co., New York.