The overcast economy: Get used to it

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NEW YORK (CNNMoney.com) -- Surprise! The economy isn't all rainbows, puppies, kittens and sunshine after all.

The drop in retail sales in March is a sobering reminder that the recession probably isn't over yet. The decline in wholesale prices last month also seems to suggest that the economy remains weak.

That led to a pullback in stocks Tuesday morning. And that may not be a bad thing after a five-week stock rally in which the broader market has surged more than 25%

But what investors and consumers need to do now is take a deep breath and relax. The economy may not be as close to recovery as traders thought it was, but that doesn't mean we're back on the road to ruin. There's no reason to start discussing the evil D words of deflation and depression once again.

"I don't think the other shoe is dropping. The economy is going to sputter up the hill. We were operating on one cylinder in January and maybe now we're operating on three," said Gary Hager, founder and chief executive officer of Integrated Wealth Management, a financial planning firm based in Edison, N.J.

For one, the March retail sales numbers follows two months of gains. So the consumer did show some signs of life earlier this year. And even the shockingly big 1.2% drop in the Producer Price Index is not as terrible as it sounds. Much of the decline was due to falling gas prices last month -- excluding the cost of volatile food and energy prices, the so-called "core" PPI was actually flat.

This is a challenging time for both consumers and investors. The current recession has been so severe and so long that it's wishful thinking to believe that the economy will suddenly turn on a dime.

The good news is that seemingly conflicting economic reports could mean that the worst of the recession is over. The peak of the crisis may well have been that awful fourth quarter that followed the collapse of Lehman Brothers and AIG (AIG, Fortune 500).

"Up until late last year all the numbers were pointed straight down. There was very little in the way of good news. It was a free fall, an elevator shaft feeling," said Stuart Hoffman, chief economist with PNC Financial Services in Pittsburgh.

"Now you are getting more mixed numbers and the conclusion I would draw from that is that while the economy may still be declining, the rate of the decline may be tapering off," Hoffman added.

Unfortunately, there will probably be many more bits of conflicting economic reports in the days, weeks and months ahead.

Some areas of the economy, such as housing, may continue to show some faint signs of improvement. But the unemployment rate may keep creeping higher. And there is also the very real chance that GM (GM, Fortune 500) could go bankrupt, an event that Hager said would probably be the "last gasp" of this recession and bear market.

Anyone who is expecting every single important economic indicator to either paint a picture of an economy on the verge of a sharp comeback or an economy headed for impending doom is deluding themselves.

"This is basically what happens at this point of a downturn. You have a bit of good news and then some disappointing news," said Kurt Karl, chief U.S. economist with Swiss Re in New York. "We are bumping along the bottom. You pop up for awhile and then you pop back down."

So one of the biggest mistakes that a consumer or investor can make is to buy into the notion that the economy can be described in black/white terms. Karl warned that this type of environment -- where various economic reports vacillate between good and bad -- could last for another year and a half.

"It's not going to be fun for quite awhile. It's a time of high uncertainty and it's tough to get a consistent pattern of data points," he said.

Hoffman added that it's going to take more time for economic stimulus and some of the many programs launched by the Federal Reserve and Treasury aimed at getting banks back on track to truly have an impact on the economy.

And he stopped short of saying that "green shoots" -- the oft-used farming metaphor to describe a potential recovery -- are visible just yet.

"Frankly, the seeds may be in the ground but before green shoots take root they need a lot more fertilizer in the form of better credit flows and rain in the form of liquidity from financial institutions," he said.

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