Recent economic data have been far from supportive of a “robust” recovery, fueling speculation of a “double-dip” recession and calling into question fears over the possibility of deflation.
Those expecting a bad outcome over the next few quarters can point to abysmal home sales data in the wake of the expiration of the home-buyers tax credit, the especially poor July report on durable goods, and a slowdown in GDP growth over the past few quarters (complete with a second-quarter downward revision from 2.4 percent to 1.6 percent, according to the second estimate). Those on the other side of the discussion are likely to point out that the housing data have been especially noisy because of the tax incentives and any trend interpreted from those data should be taken with more than a few grains of salt. Moreover, the second-quarter GDP revision had a couple positives sprinkled in. First, personal consumption was revised up to 2.0 percent from 1.6 percent in the second quarter, pushing its year-over-year growth rate up from 0.8 percent to 1.7 percent. Even with relatively low capacity utilization levels, private investment in equipment and software rose 24.9 percent in the second quarter (its strongest quarterly growth rate since the mid-1980s). Also, Real Gross Domestic Income (GDI)—an alternative measure of economic performance—is trending at 3.2 percent on a year-over-year basis, after a 2.3 percent gain in the second quarter.
Still, the employment situation looks dour, with initial claims hanging up at uncomfortably high levels and an average gain in private payrolls over the last three months of 51,000, hardly enough to eat into the already large amount of labor market slack.
That large level of slack continues to exert downward pressure on wages and prices, which are at already low growth rates. Long-term inflation expectations remain relatively stable though and we have yet to see widespread decreases in wages, keeping underlying inflation trends from turning negative.  [2010-08-27]  

Indicators of underlying or “core” inflation (the median CPI, 16 percent trimmed-mean CPI, and the core CPI) have all been relatively subdued lately, with 12-month growth rates all below 1.0 percent (roughly 45-year lows). However, over the past few months the core CPI has been running at a slightly higher rate than 1.0 percent. Nevertheless, an new indicator more closely associated with future inflation—the sticky-price CPI—rose just 0.9 percent in July, in line with its 12-month growth rate of 0.8 percent. Also, core services prices—services less energy services—rose 1.2 percent in July, somewhat softer than their three-month annualized growth rate of 1.6 percent. On the other hand, core goods prices (commodities less food and energy), which are only up 1.0 percent over the past 12 months, jumped up 2.5 percent during the month.
Importantly, (especially given how sluggish the overall economy seems to be at the moment), consumer expectations for future inflation have been reasonably well-anchored; longer-term (5-10 year-ahead) average expectations were 3.1 percent in the August survey, close to their 10-year average of 3.3 percent.   [2010-08-27]  

The BEA reported that GDP in the second quarter grew at an annualized rate of 1.6 percent, sharply lower from their earlier estimate of 2.4 percent. The main reason for this deceleration (GDP had grown at 3.7 percent in the first quarter) was the fact that imports grew an incredible 32.4 percent. Personal consumption expenditures grew by roughly as much as in the first quarter, that is about 2 percent, with durables purchases leading the way again. Private investment grew at 25 percent, fueled by healthy increases in residential structures and the fact that investment in nonresidential structures has actually increased for the first time since the second quarter of 2008. Production sentiment showed some signs of recovery with the ISM’s Purchasing Managers’ Index for manufacturing increasing in August after consecutive declines since April.  [2010-09-02]  

Housing market indicators have been abysmal directly following the expiration of the tax incentives for homebuyers. Notably, single-family home sales fell 12.4 percent to an annual sales pace of 276,000 units in July, setting a new record-low pace for the 47-year-old series. Also, existing single-family-homes sales plummeted a record 27.1 percent in July, following declines of 1.6 percent in May and 5.6 percent in June. The massive retreat in sales was widespread across all regions of the U.S., lowering the annual sales pace to 3.37 million units, the slowest pace since May 1995. While trying to tease out a signal from July’s data may be futile, the sales path for housing surrounding the tax credits should go down as another example of people responding to incentives. On the bright side, mortgage rates have fallen to historic lows and housing prices have remained soft. These fundamentals should be supportive for buyers looking to enter the market.
While consumers certainty didn’t purchase many houses in July, it seems they didn’t purchase many retail goods either, as an indicator of the trend in retail sales—sales excluding autos, building supplies, and gas stations—fell 0.1 percent during the month and is virtually unchanged over the past three months, diverging from its 12-month growth rate of 4.0 percent. An interesting dynamic to watch over the coming year will be the path of consumption versus the personal savings rate. As individuals look to repair their balance sheets in the wake of such a large negative shock, savings rates are likely to continue to climb, which may put downward pressure on consumption.  [2010-08-27]  

Employment levels in the Fourth District’s main metropolitan areas were steady to down slightly over the June to July period. Cleveland’s and Cincinnati’s employment levels held steady, while Pittsburgh’s and Columbus’s employment fell slightly. Since the beginning of the year, Cleveland has experienced some rebound in employment, adding roughly 20,000 jobs. However, Cleveland also experienced a relatively large slide in employment over the last recession and thus is recovering from a low level. Currently, the Cleveland metro area is still down 65,000 jobs, representing roughly 6 percent of its prerecession employment. On the other hand, Pittsburgh has experienced a much milder recession, having lost on net 27,000 jobs (2.3 percent of prerecession employment). This better performance is also reflected in the fact that Pittsburgh has had a lower unemployment rate over the recession compared to other Fourth District metro areas or to the nation, as a whole.
This tepid recovery is seen in recent bank lending trends, as well. Our regional trends article on Small Business Lending highlights some key features of business lending for both the nation and for the Fourth District. From the perspective of the firm owner, bankers appear to be reluctant to lend regardless of credit history or ability to repay. In turn, bankers say that while lending standards remain tight, they have the capital and are anxious to lend, but demand is low. The key take-away from the article is that loan activity is low and such reticence to either borrow or lend will certainly slow the nascent recovery.  [2010-09-01]  

The labor market continued to show some improvement in August, though the pace of job creation remained quite weak. Private sector employment expanded by 67,000 in August, though overall payroll employment declined by 54,000 because of a drop in Census-related employment. July’s private sector employment was also revised up to show a rise of 107,000. On the household side, the unemployment rate rose slightly to 9.6 percent and the employment-to-population ratio remained at a very anemic 58.5 percent, close to its recent lows.
Goods-producing industries showed no change in employment, while the service sector expanded with relatively large contributions from the temporary help and health-related industries. Looking at the distribution of employment changes across more detailed industries, we see that employment diffusion indexes show that a little more than half of all industries expanded employment over the last month and over the last three months. This month’s Trends article provides more detail on differences in payrolls and vacancies across sectors and across the cycle.  [2010-09-03]