The Economy Improved In July


The Chicago Fed National Activity Index rose to 0.27 in July, with all four categories of indicators rising. The 3-month average was unchanged at -0.09. That indicates growth is slightly below trend and is far from the recession threshold of -0.7.

The index had been down for two consecutive months, and both May and June were revised slightly lower. The data in August so far has been positive as well, particularly the production data, with IP last week surprising to the upside.

I know it is trendy to see the US economy as heading for or in recession, but the data just doesn’t agree. I am not unaware of the risks, and if I had to guess, I’d say we will have a recession, probably starting in the first half of next year, which is when futures markets indicate rates are likely to peak. But recession isn’t really the proper question for investors. The right question is, what has the market already discounted? Was the June low in stocks sufficient to price in whatever is coming? The rebound in stocks suggests it is, but stocks don’t have a very good track record with regard to the economy.

Bond markets are generally where we look for evidence of future economic activity. Right now, rates are in an uptrend, credit spreads have narrowed from their worst levels, and the yield curves are steepening (slightly) in a good way – long rates rising faster than short rates. That would seem to support the idea that economic activity bottomed in Q2. Does that mean it can’t or won’t get worse going into the end of the year? Of course not, but we aren’t in recession right now, and the data is actually pointing to an improvement.

Chicago Fed National Activity Index

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Editor’s Note: The summary bullets for this article were chosen by Seeking Alpha editors.

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