Double-Dip Watch: Did the Economy Shrink in May?

A roundup of the month's reports suggests that the U.S. economy failed to meaningfully improve. In fact, it may have contracted.

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You may have heard this already: the economy wasn't great in May. While this has been a common theme in the news throughout June, we now have a mound of evidence to prove it. As this month ends, we can assess all of the major indicators that poured in. The verdict: the U.S. now has two straight months of sideways economic activity, at best. There weren't many bright spots in May.

Here's our usual matrix consisting of 15 major economic indicators for May (click to enlarge):

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The U.S. Consumer

Let's start with some seemingly good news. In the first grouping, saving improved. While this is a good thing generally, it happened for the wrong reasons in May. People didn't save because they earned money than they wanted to spend: they saved because they cut their spending in response to weakening economic sentiment. This point is confirmed by weakening consumer confidence. Both overall consumer spending measure and retail spending declined. Real disposable income, however, increased, which turns out to be one of the few clearly positive indicators for the month, though it's hard to get very excited about a 0.08% uptick.


The real estate market continued to struggle in May. Both new and existing sales declined, remaining at very low levels on a historical basis. Although foreclosures fell slightly, their drop is thought to be more due to banks slowly fixing their flawed procedures -- not fewer defaults or distressed borrowers. So it's hard to feel very good about the direction of the real estate market based on May's data.

Business Activity

One of the other clearly positive indicators was durable goods orders. This improvement is good to see, even if the increase is modest. But considering the other business-driven indicators shown, durable goods appears to be something of an outlier in May. Although both the service and manufacturing sectors improved, manufacturing growth plummeted during the month while services growth remained dangerously close to contraction, which occurs when the index drops below 50. Moreover, the stock market declined a bit.


Finally, the labor market also sputtered. In May, we saw the unemployment rate rise. This wasn't because more workers lost their jobs. Instead, a sizable number of additional workers that had left the workforce during the recession re-entered. Unfortunately, there weren't enough jobs to go around, so many of them became designated as technically unemployed. So jobs grew modestly, but not by enough to accommodate all of the new workers in the labor force, which is why the unemployment rate rose even though the number of employed Americans grew.

A Terrible Second Quarter?

As you can see, finding ways to feel optimistic about May's economic activity isn't easy. The only clearly positive movement among these 15 indicators came through a very slight uptick in disposable income and a small rise in durable good orders. The rest of the news was clearly negative or mixed. This shows that the U.S. economy struggled in May, following an ugly April. Although we won't get much data for June until next week, if it showed similar results, then second quarter growth may have fallen to be nearly flat -- or worse, the economy may have contracted for the first time in two years.

Notes/Disclaimers about the matrix above:

  • This is by no means a completely exhaustive list, but it does take into account many important statistics.
  • It represents a somewhat quantitative summary, but no weighting has been used to create an economic index, so the reader can decide how important each statistic is for himself or herself.
  • There is some overlap.

For anyone who wants to dig deeper into the numbers above, here's a list of posts that covered some of these May indicators:

Incomes Rise Slightly as Real Spending Falls in May

No Rebound Yet: New Home Sales Decline in May

Existing Home Sales Fell to Lowest Level of 2011 in May

Foreclosures Decline Again in May as Banks Struggle to Keep Up

Small Business Optimism Weakens for Third Straight Month

Retail Sales Fall in May for First Time Since June 2010

ISM: Service Sector Grew a Little Faster in May

Hiring Slowed in May as the Jobless Rate Ticked Up to 9.1%

Consumer Confidence Drops to Lowest Level This Year

Image Credit: REUTERS/Shannon Stapleton