Last week: The latest trade data suggests that the pace of economic activity might be even slower in the second quarter than the preliminary estimate (2.4 percent annualized growth in GDP). The bigger concern is whether growth in the third and fourth quarters will be more robust. If growth remains weak, jobs, consumer confidence, income, and spending are all likely to remain weak – reinforcing a subpar economic environment, possibly through the end of the year and spilling into the early months of 2011. With monetary and fiscal policy largely on the sidelines (although for different reasons), only trade, business confidence and investment are capable of sparking some positive momentum.

THE SITUATION ABROAD

The data show a clear decoupling. Inflation is low or flat in North America and Europe. But retail inflation rose by 0.4 percent in China. The decoupling is even more stark in terms of the consumer market. For example, vehicle sales in the United States appear to have recovered to a range of 11 - 12 million units, a long way from the pre-recession pace of 17 - 18 million units. Sales in China are approaching 15 million and will very likely continue to rise.

Clearly, in one part of the world, the worry is about slow economic growth and the potential of deflationary pressure. China and India, along with some of the commodity-producing countries, are more concerned with inflation and the potential for overheating. Indeed, steps are being taken to cool off the economy. For example, industrial production in India had been running at about a 15 percent annualized pace. By June, the pace slowed to 7.1 percent.

Meanwhile, global trade is expanding at a faster pace than global GDP. That was the typical pattern before the recession. A return to these conditions also suggests that the global financial system may return to health. In short, the news isn’t all gloomy, although it very much depends on where one is located.

FACT OF THE WEEK

While consumer sentiment reflects more nervousness than optimism, The Conference Board Measure of CEO Confidence™ showed no drop in the second quarter from a relatively positive report in the first quarter. This measure is based on responses from CEOs of medium and large-cap companies. This week, the National Federation of Independent Business released the monthly results of its survey of small businesses. In May, the number of respondents suggesting conditions would improve over the next six months increased by 8 percent. Two months later, that figure fell by 15 percent, a fairly large change over a short period of time.

QUESTION OF THE WEEK

Why is consumer spending so weak? Will it stay weak?

Consumers are not spending more for at least three basic reasons. First and foremost, consumers remain worried about job and income prospects, as reflected in The Conference Board Consumer Confidence Survey®. Second, consumers are saving more – nearly 6 percent of income in the first half of 2010. Third is the slow rise in income. New figures show that incomes fell in 223 metro areas in 2009, on a year-over-year basis, and only rose in 134 areas. Incomes were unchanged in 9 metro areas. What is even more startling is that in 77 of these 134 metro areas, the rise in income was partly due to an increase in those receiving unemployment or social security benefits.

Incomes are rising more in 2010 than in 2009, and consumer spending is consequently growing a little faster. And more of the income growth now is from wages. Still, unless job growth quickens, confidence and spending may not improve.