What Happened in May?

Last month the economy seemed to take a step back. Was it a blip, or a sign of a double-dip to come?

The economic reports for May are rolling in, and so far they're pretty ugly. In the first four months of 2010, it seemed pretty clear that a recovery was upon us, though it was shaping up to be a slow one. Last month, however, the economy seemed to take a step back. Was it a blip, or a sign of a double-dip to come?

Even though we don't yet have full information to evaluate May, here's what we do know:


Unemployment technically declined in May. But a deeper look at the numbers showed that was mostly due to temporary census hiring. The private sector only hired a measly 41,000 new workers. If you subtract all government jobs, then hiring was the worst we'd seen since January.


Mortgage applications for new purchases have indicated an incredible fall in home sales following the April expiration of the buyer credit. They're down 42%. Foreclosures also continued to occur a very high rate, so housing market inventory almost certainly increased in May.


As we learned earlier today, retail sales fell by 1.2% in May -- the first decline in eight months. Consumers felt less comfortable parting with their cash last month, or more accurately, swiping their credit cards. Borrowing had been driving better sales.

Consumer Confidence

At first, it looked like consumers were more confident in May. But then Gallup provided an update for the second half of the month. It wasn't good. April's increase in sentiment was erased.


Spending was up in May, but only for the wealthy. Most Americans declined to use more of their disposable income for additional purchases. While this might be fiscally responsible, it isn't going to help economic growth.

Income Growth

One of the few bright spots in May was income growth. Hourly earnings grew by $0.07, according to BLS. That might not sound like a lot, but it's the biggest gain we've seen this year.

The economic indicators we've seen so far for May have been largely negative. The only good one was income growth, but that's a lagging indicator, as it probably even trails employment. Consumers were skittish and businesses don't seem eager to adopt the view that a strong recovery is underway.

There are still a few statistics for May that we haven't gotten. But even they don't look particularly promising either:


Consumer credit only increased in April due to the spike in home sales. With those gone, we can expect a decline in May.


These might increase in May, but probably because sales declined. Since there was little additional hiring, however, it's not likely we'll see a steep rise -- production isn't like to ramp up.


The trade deficit grew in April, mostly because exports declined so much. With Europe's trouble continuing in May, it's hard to believe that exports could have grown much last month. In fact, they probably shrunk even more.

All-in-all, May was pretty awful. But was it just an outlier in a broader U.S. recovery? It's probably too soon to know, as leading indicators are mixed. The ongoing problems in Europe certainly won't help the arguments of optimists. The housing market is also almost certain to struggle throughout the summer, as foreclosures remain high.

Yet, a new report today indicates that consumer sentiment in June might be improving. If that is the case, then maybe Americans just had an off month. Since so much depends on consumers, we should ultimately look to them to figure out where the recovery is headed. If they can manage to ignore some of the bad signs out there and spend more, then optimism could keep the recovery going.