GDP treads water
Generally accepted economic principles define a recession as two consecutive quarters of negative GDP growth. The Business Cycle Dating Committee of the National Bureau of Economic Research actual looks at a variety of monthly indicators to determine whether or not the U.S. has fallen into recession, but after all is said and done the two-quarter decline rule is consistently applied. Well, real GDP increased at a meager 0.2 percent rate in the second quarter, slower even than the anemic 1.5 percent average growth rate of the previous three quarters. Economists had actually expected real GDP to be revised down to zero growth from the prior 0.7 percent estimate, so the "stronger" figure should have consoled market players? No? In fact, it didn't.

The main source of strength in second quarter GDP came from the government sector where purchases grew at a 5.4 percent rate. Consumer spending increased at a moderate 2.5 percent rate and residential investment expenditures increased at a 5.8 percent pace. Investment expenditures on structures and equipment fell at a whopping 14.6 percent rate in the second quarter. Given the weakness in production and new orders over the past year, this was not a surprise.

The anemic pace of economic growth led to a drop in corporate profits. Aftertax profits fell at a 7.9 percent rate in the second quarter, the third straight quarter-to-quarter drop. On a year-over-year basis, the profit picture is even worse as aftertax profits declined 12.6 percent during the quarter. No wonder stock prices plunged on Wednesday after this report … even though the news wasn't entirely new to investors given all the earnings warnings and layoffs from major corporations.

Income spurt helped by one time adjustment and tax rebate
Personal income rose 0.5 percent in July after posting a 0.4 percent gain in June. Wages and salaries rose 0.4 percent in both months. Disposable income surged 1.7 percent in July partially boosted by the beginning of the tax rebate checks. In addition, transfer payments jumped as social security recipients received a cost-of-living adjustment correction that added funds from as far back as January.

While income got a shot in the arm, consumer spending edged up 0.1 percent as a drop in durable goods spending offset a gain in services. As a result, the personal savings rate shot up to 2.5 percent in July from a level of 1 percent in June. Whenever consumers receive income unexpectedly, it tends to boost the savings rate temporarily. Consumers soon put the funds back into the spending stream and the savings rate goes back to normal. As the tax rebate checks are scheduled for disbursement into September, it is likely that the personal savings rate will remain elevated for a few more months.

Housing market holds narrow range
New home sales jumped 4.9 percent in July, but existing home sales fell during the month. Consequently, total home sales edged down moderately during the month. Nevertheless, low mortgage rates are helping to maintain total home sales in a tight range that is only 4.1 percent lower than its peak earlier this year.

Low mortgage rates certainly play an important role in spurring housing construction and sales, but given the moderate pace of income growth and the rising unemployment rate, one would expect home sales to weaken. In fact, many analysts are suggesting that accelerating price appreciation in the housing market is helping to boost activity. This may be a major factor because consumer confidence remains sluggish relative to year ago levels, with two key measures both declining modestly in August. While one should not make the case that monthly movements in consumer sentiment correlate strongly with retail sales or housing activity, one can make the case that the two tend to move in tandem over the long run. Thus it is interesting that consumer confidence would remain low even though housing activity is robust.

Manufacturing sector: signs of life amid the ruins?
Factory orders edged up 0.1 percent in July after declining 2.9 percent in June. The figures are still quite anemic but were a bit stronger than predicted by economists as new orders for nondurable goods rose during the month. New orders for nondefense capital goods, considered a leading indicator of capital spending, declined yet again, but new orders for information technology actually posted a 2.1 percent gain in July. It barely makes a dent to the declines of the past few months, but recovery has to start somewhere. The chart below shows the annual changes in total orders, nondefense capital goods and information technology. Each appears to have turned up in July. But note that they are only posting smaller year-over-year declines - they haven't actually started to post a gain yet.

In a similar fashion, the Chicago purchasing managers survey (PMAC) increased in August to a level of 43.5 percent from July's level of 38 percent. Any level below 50 percent signals a contracting manufacturing sector, but the August numbers do suggest that the rate of decline is slowing. More than one month's set of data is required to confirm an upward trend, but the combination of two separate indicators showing improvement makes the case hopeful, at least.