In the US economy, there is moderate recovery in economic activity. Household spending is increasing, but remains constrained by high unemployment, modest income growth, lower housing wealth and tight credit. Business spending on investment and software has risen strongly, but investment in non-residential structures is weak.

Because of uncertainty about both the economic outlook and public policy, employers appear quite reluctant to alter payrolls. Non-farm payroll employment is growing only very slowly.

The good news is that employers continue to lengthen workweeks for existing employees. The workweek in manufacturing is now at its highest level since July 2000 and overtime hours per worker are at pre-recession levels.

Our research department has just published a note on the current economic strategy, Fear, not Fundamentals, that noted in recent weeks, the S&P 500 Index in the United States has fallen to levels not seen since October 2009. This has led some commentators to suggest that the US economy must be moving into a new recession.

Fundamentals are entirely the reverse. The Chicago Fed National Activity Index for May released on 28 June suggests that the US economy is in the best shape since March 2006.

The Chicago Fed National Activity Index is a weighted average of 85 indicators of national economic activity. The indicators are drawn from four broad categories of data:

  • Production and income
  • Employment, unemployment, and hours
  • Personal consumption and housing; and
  • Sales, orders, and inventories.

A zero value for the index indicates that the national economy is expanding at its historical trend rate of growth, while negative values indicate below-average growth and positive values indicate above-average growth.

The three-month moving average of the index for May rose to its highest levels since March 2006, increasing to 0.28 in May, up from 0.05 in April.
This result for May suggests that growth in US activity was above its long-term historical trend. The Chicago Fed tells us that the index has now moved to a level historically associated with a mature economic recovery following a recession. On the other hand, the result for May indicates limited inflationary pressure over the coming year.

Production related indicators made a contribution of 0.51 to the index in May compared with 0.39 in April. Industrial production rose by 1.2 per cent in May. Manufacturing production increased by 0.9 per cent.

Manufacturing capacity utilisation rose to 71.5 per cent in May, from 70.8 per cent in April. The result for May was the best since October 2008.

Employment related indicators added 0.06 to the index in May, down from 0.21 in April. Total non-farm payroll employment rose by 431,000 in May, after rising by 290,000 in April. The sales, orders and inventories category also contributed 0.6 per cent to the index in May, up from 0.4 per cent in April.

On the other hand, consumption and housing remains soft – 0.42 in May, slightly worse than the -0.40 in April. Housing starts and building permits both declined.

In spite of this, 44 of the 85 individual indicators made positive contributions in May. What this tells us is that even though the consumption and housing area is weak, the other areas of the economy are strong enough to produce above average growth.

We are in a world where consumers must now save rather than spend. However, we are still in a world where the rest of the US economy is strong enough to still grow while this is happening.

We are seeing much more discretion in the area of consumer spending and investment in areas such as technology and business remains robust.

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