There was a time when we mocked all those who said the US economy can sustain some sort of organic, Fed-free recovery on its own, and perhaps, just perhaps, regain the virtuous cycle. We now just feel sad for them. The latest confirmation why those perpetual optimists will likely never again get it correct in their lifetimes, except for the 1-2 month (and increasingly shorter) period just after a new LSAP program is introduced by the Fed, is the June US economic report card. Courtesy of Bank of America we see that 22 of the 30 most important economic indicators in June missed expectations. And since this includes the seasonally adjusted July 7 claims beat, which was discovered to have been merely a seasonal auto-channel stuffing gimmick, the real number of misses is 23 out of 30, or a whopping 76% fail rate.
The BofA post mortem on the above data:
Data releases continue to come in below an already beaten-down consensus. As we have noted before, June data should be relatively immune to the weather distortions that boosted the data in the winter and weakened the data in the spring. Yet, as Table 1 shows, 22 out of 30 indicators covering the month of June have surprised to the downside. Moreover, the weakness is not concentrated in second-tier data: the big three of payrolls, retail sales and the ISM have all been weak.
Why are the recent data so weak? In our view, it is mainly a matter of confidence. The last several years have featured a number of false dawns. Each time the US economy looks better for a while, economists boost their numbers and start taking about “take off speed,” only to see growth falter. Similarly in Europe, each time a new rescue plan is announced there is a period of optimism in the markets, only to see the crisis pop up again. This long string of false dawns is slowly eroding away confidence in the recovery.
Looking ahead, we see mainly downside risks to our well-below consensus forecast. If our Q2 GDP tracking model is correct, growth in the first half of this year—including weather-boosted Q1 and weather-payback Q2—averaged just 1.5%. The weak finish to Q2 means a negative “base effect” for Q3—specifically, data surprises in the last several weeks lowers the tracking for Q3 GDP growth by about 0.3 pp. The consensus has been drifting lower, but it still expects growth to pick up to 2.2% in Q3 and Q4.