Blogs & Comment

Are those cracks opening up in the U.S. recovery?—Erica Alini

What bad economic data likely means.

(Creative Commons/Keoni Cabral)

(Creative Commons/Keoni Cabral)

We all knew the pace of U.S. growth would slow in the second quarter. With the impact of higher income taxes for the wealthy and higher payroll taxes for everybody gradually sinking in, and Washington cutting off random parts of the federal budget like a drunk guy with a saw chain, it couldn’t be otherwise. But are things getting a little too slow now?

A streak of disappointing data

The latest numbers around the two great hopes of the recovery, the housing market and consumer spending, were underwhelming. Housing starts declined 9.9% in June from the previous month, well below most forecasts, which predicted small gains. Building permits, an important indicator of construction intentions, fell as well by 7.5%. Sales of existing homes, likewise, slipped by 1.2% last month, coming in at 5.08 million units rather than the expected 5.26 million.

American shoppers, for their part, stopped cooperating too. Retail sales inched up a meagre 0.4% in June, half the consensus forecast. And that dismal growth turns to a 0.1% dip if you exclude auto and gasoline sales.

Trade was another disappointment. Net imports rose 12% to $45 billion in May, higher than the $40.3 billion economists were hoping for, a sign of continued weakness in global demand.

No wonder a number of big banks, from Barclays to Goldman Sachs, have revised their Q2 forecast down.

Still, there are some important caveats

A look at the fine print, though, suggests the economy is probably in slightly better shape than the data indicates. On housing starts, as economist Brian Wesbury pointed out, much of the decline was driven by the condo sector, which is notorious for wild swings and widely believed to be overheating anyway. Single-family starts, which have been tagging along at a slower pace but are the backbone of the U.S. residential housing market, slipped only a tiny 0.8%. Besides, the weather in June was remarkably unpleasant throughout the country—and no one likes to build a house in the rain.

Home sales are a bit more puzzling because the obvious suspect for the slowdown—rising mortgage rates—doesn’t fit the bill perfectly. As Nick Timiraos, at the Wall Street Journal, points out, “mortgage rates began to rise during the last week of May, and many homes that sold in June went under contract in May—before rates really began to rise.” Still, it’s important to keep in mind that house prices are still soaring (up 13.5% year-over-year last month) and until inventory is low—and it is still very low—they have nowhere to go but up.

The dip in retail sales looks like a temporary hiccup too, and one that had to be expected. Americans seem to have taken a mighty long time to notice that, starting on Jan. 1, the government has been taking a slightly bigger slice out of their monthly paycheques. Four months into the year, as I noted, everyone was still spending and paying down debt like nothing had happened—with the extra cash coming from savings. Maybe the light bulb finally went on in June: “Gee, honey, what happened to our rainy day fund?” Anyhow, the retail dip isn’t expected to last. If the labour market holds up, people should be back in the stores soon.

Trade is the most worrying statistic of the lot. Unfortunately, there are no signs of letup here any time soon. Europe is a long way from climbing out the eurozone crisis and emerging markets—which were supposed to drag the Western world out of the doldrums—are in a funk too, for numerous reasons that economist Nouriel Roubini just listed here yesterday.

Still, here’s a (tiny) bit of good news we can look forward to in the next weeks: Automakers are expected to skip their usual summer shutdowns this year, meaning fewer Americans will be out of a job. Soaring demand for trucks and cars will likely keep factories open in July and August, when they usually close for upgrades and such. The temporarily laid-off workers are eligible for unemployment benefits and usually inflate initial claim numbers for a few weeks in July and August. Instead “we could see a much lower-than-expected reading on claims,” BNP Paribas’ Colin Bermingham and Laura Rosner predicted in a recent client note. Of course, that would only be a cosmetic touch-up to the labour statistics—but, hey, some of the recent bad news looks just as transitory and superficial.

Likely consequences

In sum, there’s no reason to get seriously worried (yet). The shabby quarter is turning out to be a bit shabbier than expected, but analysts still trust in a pickup toward the end of the year.

The main short-term consequence from all this, really, is that the beginning of the end of the Federal Reserve’s quantitative easing program will likely come a bit later in the fall than Chairman Ben Bernanke might have anticipated in his rather bullish remarks after the June Federal Reserve Open Market Committee’s meeting. The economy is clearly tracking well below the Fed’s latest projection for 2013, which sees growth at between 2.3 and 2.6% of GDP. Unsurprisingly, Bernanke struck a more dovish tone in his latest tete-a-tete with American lawmakers.

In sum, take a deep breath, enjoy the rest of the summer—and hope for some momentum in the fall.

Erica Alini is a California-based reporter and a regular contributor to, where she covers the U.S. economy.