A slew of weak activity data out of the US recently points to the economy having hit another soft patch:
1) Real incomes went nowhere in the first part of 2011 (see post below).
2) The Conference Board consumer confidence index fell from 66.0 in April to 60.8 in May. No doubt the fact the US housing market is still struggling to find a base and bad weather were more than sufficient to offset early modest declines in petrol prices.
3) The ISM manufacturing index fell from 60.4 in April to 53.5 in May. New orders fell from 61.7 to 51.0 while production fell from 63.8 to 54.0. Motor vehicle production was a factor in the weakness and reflects the automotive parts shortage following the Japan earthquake. This decline matches the fall in the non-manufacturing index in the prior month.
4) Non-farm payrolls rose a disappointing 54k in May, well down on the 232k in April. Of most concern to the Fed will be the nudging up of the unemployment rate to 9.1%, up from 9.0% in April and 8.8% in March. While weather and the Japan earthquake were a factor, the weakness was broader based.
This is not the first soft patch for the US recovery; remember the double-dip concerns from the middle of last year? The explanation now is much the same as it was then: the US recovery will be hard work and it has been, and will continue to be, non-linear in fashion. That means it will hit some rough patches along the way.
At this stage it looks like Q2 GDP will struggle to do better than the 1.8% seasonally adjusted annual rate (saar) posted in the first quarter. The positive spin is that as concerns about growth mount, commodity prices should continue to fall which would provide some welcome relief to household budgets and consumption as the year progresses. In the meantime, expectations of a tightening in monetary conditions will contine to get pushed out further into 2012. That is entirely appropriate.