Who’d have thought that, until recently, anyone other than economists at the European Union, International Monetary Fund, European Central Bank would care a whit about the fiscal status of Greece, Italy, Ireland, Portugal, Spain and other small European countries?  US investors have learned more about those nations than they perhaps ever cared to, especially the ability of small nations to unwittingly create dramatic turmoil in the financial markets.  Since we at Harmonic have been focused, like most others, on the explosion onto the world stage of sovereign risk among Euro-zone countries, the never-ending flow of US economic data has been pushed to the back burner. It appears upon examining recently released data, however, that the US economy may have slipped into what research firm International Strategy & Investment (ISI) refers to as a “soft patch.”

The strength of the economic rebound from the painful 2008-2009 recession was surprising to many observers (yours truly included) ; whether that rebound is sustainable remains a legitimate subject for debate. The manufacturing-led and stimulus-fueled rebound appears to have stalled recently:

• the weekly unemployment figures are remaining stubbornly high
• consumer spending data released May 28 showed a slowdown
• ISM’s manufacturing PMI released June 1 remained in growth territory but softened
• the Economic Cycle Research Institute’s Weekly Leading Indicator,  a composite of several indicators, has slowed markedly of late (chart below)

The downturn of the growth rate and level of the WLI are of particular concern to me; I’ve noted in earlier posts that the WLI has historically been a solid predictor of US economic activity.

Those concerns noted, the balance of economic data released in the past couple of weeks has been positive. Of particular interest were:

• strength in housing sales (although these were undoubtedly boosted by homebuyers hurrying to capture government tax credits by signing contracts before their April 30 expiration)
• consumer sentiment was reported rising and higher than expected
• a very broad coincident indicator, the Chicago Fed National Activity Indicator, has continued to rise and is now in “normal” territory.

The so-called “soft patch” is a reminder that the US and world economies are far from out of the woods; while such pauses in economic recovery are probably to be expected, the exceptionally high unemployment rate, skyrocketing fiscal deficits, number and magnitude of economic problems confronting the US and other world economies continues to suggest a longer and rockier road to stability than in other post-war recoveries.