Double Dip Approaches? Why the Recovery Has Stalled
A roundup of June's indicators shows that the U.S. economy is in trouble
June was an ugly month for the U.S. economy. After seeing the recovery slow in April and May, the backwards trend continued through the end of the second quarter. Taking stock of the major economic indicators, you really have to squint to see anything good. One thing is clear: the U.S. economy had better break out of its funk if it wants to avoid a double dip.
Here's our usual roundup of 15 major economic indicators (click to enlarge):
That's a lot of red. In fact, if you compare the chart to those from April and May, you can see a steady decline as more indicators are turning red. In June, 10 were worsening, compared to eight in May and seven in April. The direction of change doesn't provide any reason for optimism either. A majority of June's worsening indicators are either newly negative or getting worse faster than they were in May. Let's look a little deeper.
The U.S. Consumer
If there's any way to squeeze some hope out of the grim June statistics, it would be by hoping that consumers are responding positively to declining energy prices. Although real consumer spending technically worsened during the month, it was really virtually flat. That's by no means wonderful, but it's certainly better than the declines we saw in the prior two months. Retail sales, however, increased and hit another new high. This stronger spending came despite worsening consumer confidence; however, we know that in July confidence actually rose a bit.
Perhaps a small bump in disposable income helped during the month. That marks one of the few clearly positive developments in June. Although additional saving is also a good thing, it indicates behavior typical of wary consumers. During the month, saving rose by the most in more than a year.
The news is all bad here. New home sales shrunk faster in June, while existing home sales also declined. Meanwhile, foreclosure activity increased. Of course, these days it's hard to tell much from foreclosure activity, since banks continue to distort the market as their procedures evolve.
Firms clearly weren't feeling very comfortable with the economy in June. Small business optimism continued to tick down for the fourth straight month. Durable goods orders slowed. Although the service sector continued to grow, it did so at a slower pace than in May and is approaching contraction (which occurs when the index shown drops below 50). Although the manufacturing sector grew faster, we learned on Monday that in July the index plummeted and is nearly shrinking. For a final slap across the face, the stock market declined by a bigger percentage than in May.
The labor market also worsened during the month. The unemployment rate rose as the number of employed Americans shrunk. Although more jobs were created according to a separate government survey, the 18,000 it reported aren't nearly enough to keep up with increasing population.
Where the Economy Goes from Here
So all this looks pretty bad. The recovery clearly deteriorated from April through June. How does the U.S. avoid a double dip? Let's consider the major reasons for the economy's recent struggle. First, the housing market was very weak as home prices declined. Second, rising energy prices stressed consumers. Finally, events abroad including a severe earthquake in Japan and unrest in the Middle East caused negative economic shocks.
Those latter two reasons shouldn't be as much trouble going forward. We're already seeing energy prices decline, and those temporary disruptions appear to be behind us. The housing market will likely continue to act as a drag, but that's nothing new: it has been very weak for a year. So if consumers and businesses see their food and energy costs relax a bit and paired with greater economic stability, the recovery could get back on track. But even that best-case scenario, we would likely be heading back into excruciatingly slow recovery-mode, not a sudden boom.
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.
Image Credit: REUTERS/Joshua Lott