As we approach the year’s midpoint, the equity markets remain on fire – but will economic conditions support further advances in the second half? The answer is a definite maybe, and you can take that to the bank.

Consumer spending was surprisingly strong in April, and as consumers go, so goes the U.S. economy. Thanks to lower gasoline prices and belated tax refund checks consumers decided to spend rather than save their mini windfalls.

The 0.1 percent increase in spending wasn’t a blockbuster but it signaled a positive start to the second quarter. The hope is that consumers have adjusted to the payroll tax increase, and bolstered by rising home and equity prices, will continue to spend.

As dysfunctional as Washington continues to be, the federal budget deficit is quickly shrinking. The Congressional Budget Office expects the fiscal year’s deficit ending Sept. 30 to drop to $642 billion. Never thought $642 billion of red ink would look good, but coming on the heels of four straight years of trillion dollar holes, Washington should be handing out cigars.

The deficit decline was the result of higher tax receipts and lower spending. Funny how that works. Higher tax rates help in more ways than one. There’s the obvious, and then, there’s the additional income that the government enjoyed from one-time moves made by the wealthy to take advantage of the lower 2012 tax rate. It also didn’t hurt that Freddie Mac and Fannie Mae are expected to fork over $95 billion in dividends.

Don’t get too jolly over the smaller hole the government is digging. The CBO estimates the gap between government spending from 2014 to 2023 will be $6.3 trillion.

It could be a banner summer for the housing market. A component of the producer price index that measures prices received by real-estate agents and brokers registered its largest year-over-year increase in almost eight years. And the March-to-April jump of 2.7 percent was the largest March-to-April increase in the 17-year history of the series.

Normally, I don’t put much credence in a single data point, but housing is consistently improving and this is a stellar start to the prime selling season. If the real estate market maintain its momentum, its bodes well for the economy in general.

On the down side, the manufacturing sector is sputtering. According to the Federal Reserve, manufacturing activity declined 0.4 percent in April. A separate survey from the New York Fed also indicated declines in that state in May. Luckily, manufacturing only accounts for about 12 percent of gross domestic product.

Part of the manufacturing decline can be attributed to troubles abroad. The euro zone remains in a funk. The downturn is officially the longest Europe has experienced in the postwar era. Predictions are that growth will return next year. However, given that Europe has only papered over its systemic problems, the next crisis remains potentially around the corner.

Southern Europe is a mess while France’s economy also is steadily contracting. Only Germany’s economy has been able to sustain growth, but barely so. With the euro zone accounting for 17 percent of world’s GDP, its struggles will continue to weigh on the global economy.

By most standards China’s economy is robust, but even its growth has slowed more than expected. Late last year, a Wall Street Journal survey of 18 economists resulted in a median forecast for growth in 2013 of 8 percent. Today, those expectations have been lowered to 7.8 percent. Two-tenths of a percentage point doesn’t seem like much, but given China is now the world’s second-largest economy, the small decline is magnified.

One global bright spot is Japan. Well, that is if you believe a flood of easy money and a practically instantaneous 20 percent devaluation of your currency is a magic fiscal elixir. Named after Japan’s Prime Minister – Shinzo Abe – Abenomics basically takes Fed Chairman Ben Bernanke’s quantitative easing strategy and pumps it with steroids. It’s the equivalent of fiscal ecstasy and is all the rage these days among central bankers.

Its popularity is easily explained: it makes us feel better, particularly the wealthy among us. Quantitative easing is why the U.S. stock markets have hit all-time highs. It is now the reason why Japan has emerged – at least momentarily – from a decades-long economic funk. For the first three months of the year, Japan’s economy grew at an annualized pace of 3.5 percent. And if you think our stock markets have been on a roll, Japan’s Nikkei index is up 45 percent for the year.

It’s hard to argue with the economic euphoria that an easy money policy brings. The only problem is that, at some point, the money must stop rolling in. And then what happens? Unfortunately, nobody knows because no one has flooded the world with this level of liquidity.

So, when you attempt to discern what the markets will do in the second half, you can virtually ignore the economic fundamentals. You need look no further than the Fed. If they start pulling back, so will the equity markets. If the Fed keeps the printing presses running, the markets will roll on in unison.

Author, professor, entrepreneur, radio and TV commentator Tony Paradiso can be reached at
tparadiso@tds.net.