Recovery Returns: What You Need to Know About the Economy in July

Despite some continued weakness, the economy actually looked a little better during the month than it did in May and June

Despite some continued weakness, the economy actually looked a little better during the month than it did in May and June

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If the U.S. is headed for a double dip, it didn't appear to get there in July. Although the economy remained weak, it actually performed better during the month than it did in June or May. You can see this fairly clearly by considering a broad cross-section of economic reports for July. Unfortunately, not all sectors are expanding together, so we'll likely continue to see sideways motion, instead of positive momentum propelling the recovery confidently forward.

The Basic Analysis

For some time now, I have used the chart below to help provide a qualitative and somewhat quantitative picture of how the economy is performing each month. I have boiled it down to 15 key indicators that help to evaluate several of the most significant sectors of the economy. This month, I expand the analysis broadly. It will now also include a section of additional indicators as well as two quarterly charts that provide some more stats as well as performance for major firms.

But let's start with the usual chart (click on it, and the others, to enlarge):

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The U.S. Consumer

From April through June we saw consumer spending decline, if adjusted for inflation. But in July that changed significantly. The increase was the largest since 2009. Retail sales also grew more rapidly. With spending rising, it should come as no surprise that consumer confidence had also improved. Unfortunately, we know that the modest increase in confidence didn't hold up in August. Instead, it plummeted. This might mean that spending declined again last month, but in July consumers appeared to feel a little better about the economy.


The one sector that can't seem to gain any traction is housing. New home sales continue to decline, now for three months straight. In July existing sales fell as well. Although foreclosure activity declined, this is more likely an indication that banks are continuing to slow down their foreclosure procedures than a cheerful verdict on the status of distressed homeowners.

Business Activity

Although business activity generally expanded in July, it did so at a relatively slower pace. Optimism continued to fall among small business owners, now for five months straight. Although services and manufacturing grew, their rate of expansion has slowed to the point where each is very near contraction. The stock market has also hit a rough patch.


Unfortunately, the labor market isn't showing much progress. Although the unemployment rate declined slightly in July, the result is tough to celebrate. It is mostly due to discouraged workers leaving the labor market, rather than more unemployed Americans finding jobs.

Some Additional Indicators

Below you'll find a new chart, which broadens our discussion of the economy. These results aren't as easy to group into categories of good or bad, but much can still be learned from them.

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You can see that inflation expanded in July after declining in June. This is actually pretty bad news. We may have seen spending rise in July in large part because consumers felt less pressure from rising prices after the June decline. But if prices continue to rise, then spending might fall again.

Treasury yields remain very low, though you saw a little uptick in short-term Treasuries due to all of the debt ceiling nonsense in late July. That also boosted U.S. CDS spreads. Looking at CDS, the U.K. and Spain had a pretty rough July. But the market perceived Greece's sovereign debt as a little less risky during the month, after its CDS spreads rose significantly in June.

The commodities shown also saw prices rise in July after the decline in June. These results were due in part to rising inflation in July and falling inflation in June -- especially for gasoline. Although average stock market volatility was a bit lower in July than in June, we know that it grew significantly in August (not shown).

Growth and Other Notable Quarterly Indicators

Here is a bit more data on the economy, based on quarterly results:

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GDP has been weak in 2011. Its 1% annualized growth rate for the first quarter, compared to the second, isn't nearly as high as we'd like to see for a stronger recovery. Even looking at GDP year-over-year, you can see that growth hasn't been stellar.

The weakness in the second quarter was due in large part to two factors: consumers and the government. Since Americans' spending didn't grow very much, GDP had a tough time increasing significantly. Consumer spending makes up a very large portion of GDP. Meanwhile, government expenditures have been falling recently. You can see that the other two factors -- business investment and net exports -- both grew at a much brisker pace than the overall growth rate.

One of the other components, consumer credit, also provides an interesting implication. It grew moderately in the second quarter. But during the same period, we can see that consumer spending was nearly flat. This appears to imply that Americans are relying more on credit to support spending growth.

Selected Corporate Performance

Finally, how are large corporations doing? The chart below shows 10 selected major firms across a variety of sectors, most of which are Dow Jones Industrial components:

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One result should practically leap off the screen: just one of these firms experienced a loss in the second quarter. Moreover, all firms but two (BOA and J&J) saw year-over-year net income growth. So most of these firms aren't hurting; indeed, they're generally growing briskly. The eight that saw a positive net income reported year-over-year growth exceeding 10%.

So if these firms are doing so well, why aren't they hiring more workers? The revenue side of the equation sheds some light on this disconnect. Generally, revenue growth shown was lower than profit growth. In fact, GE actually saw revenue decline year-over-year, but still experienced 18% net income growth. For most of these firms, this implies that they are boosting growth by so much by managing their costs better. And with relatively modest revenue growth, they don't need to increase their workforces very aggressively to keep up with demand.

The Narrative Hasn't Really Changed

That's a lot of information here to process. But really, it all points to a rather clear conclusion: the economy isn't expanding rapidly. Yet it isn't contracting either. July appeared to be a somewhat better month than May and June, but it was still weak by recovery standards. The big obstacles continue to be the housing market and unemployment. Both likely play a part in keeping spending weak, which is what's holding back both growth and additional hiring. Unfortunately, there's no quick fix here.

Notes/Disclaimers about the matrices above:

  • This is by no means completely exhaustive, but it does take into account many important statistics.
  • They 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/Allison Joyce