Are happy days here again?

The U.S. Commerce Department said on Friday that the economy expanded at an annualized rate of 5.7 percent over the last quarter. Are happy days here again? Most of the expansion was due to businesses rebuilding depleted inventories, not consumer buying. Maybe the good times will roll, but I'm not convinced due to warning signs from the private sector.

Jack Willoughby, a senior editor at Barron's magazine, has a knack for identifying significant problems in securities markets. Remember the "dot-com" crash of 2000? Willoughby's article "Burning Up" was the canary in the stock market coal mine. He told the world that dot-com earnings were skimpy or non-existent and he predicted accurately when these companies would burn through their cash and run out of money. Shortly after Willoughby's burn-rate charts hit the street, stock values plunged.

It may be wise in 2010 to read between the lines in a recent Willoughby offering: In "Profiting From a Mortgage Crisis," he tells the story of mortgage processing firm Lender Processing Services. He reports that revenue of LPS's default services unit has swollen to $1.3 billion. The company's future may be sunny because, as Willoughby reports, 6 million U.S. mortgages are in jeopardy of foreclosure (known as the "shadow inventory"). It's good news for LPS, but it may be a warning sign for the U.S. economy. Willoughby doesn't make any predictions this time, but he does quote LPS director of analytics Ted Jadlos, who said, "The federal government and the public at large have yet to acknowledge the scope of the delinquency problem. It's bad, and it's going to get worse before it gets better." And Bloomberg reports that the International Monetary Fund is expecting another $3.4 trillion in toxic assets to unwind.

In other news, EverBank senior vice president Chuck Butler reported on Friday that the real U.S. unemployment rate might be 20 percent according to Shadow Statistics. As further evidence that unemployment may be gloomier than the official 10 percent rate calculated by the Bureau of Labor statistics, Charles Biderman, CEO of Trim Tabs, a company that specializes in financial data mining, told Canada's Business News Network, "The economy is not bottoming out, but continuing to get worse." Biderman based his comment on federal withholding tax data that his company tracks on a daily basis. He also noted that the 2009 stock market rally might have been driven by the Federal Reserve purchasing stock market futures in after-hours trading to create a "wealth effect."

Are happy days here again? On the bright side, some economists believe rebuilding inventories is the first step to recovery, but there's reason to be skeptical according to private sector data.