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The Sluggish Expansion Continues

The United States economy continues to expand, although its pace is well below the long-term average, according to the new edition of Business Conditions Monthly, out today from the American Institute for Economic Research.

The leading indicators index in our Business Conditions Cycle model, which attempts to anticipate recessions, stayed at 42 percent in August, unchanged from July. Our leading indicators have been in the 38-50 range for seven months now. “Normally, readings below 50 begin to raise warnings about an increased risk of recession. However, we believe the results over the past seven months are consistent with overall slow growth,” according to the report.

The indicators from August data include:

–        Initial claims for unemployment insurance are near record lows, while the average workweek in manufacturing has moved higher, providing support for the upward trend in real retail spending. The consumer has been the foundation of this economic expansion.

–          But consumer expectations and real new orders for consumer goods have both deteriorated.

–          Trends in real stock prices and the yield curve have been favorable, while debit balances in margin accounts have been negative.

–          Weakness in manufacturing and business investment continues.

“These data confirm that the consumer sector is likely to remain the engine of growth, offsetting weakness in capital investment,” according to the report.

The economy grew at a 1.1 percent annual rate in the second quarter, compared with a long-term annual rate of 3.2 percent. Consumer spending rose 4.4 percent during the quarter, and contributed 2.9 percentage points to overall economic growth.

Business fixed investment’s weakness was mainly due to the domestic energy industry. But business investment may improve in the second half of the year, as declines in the energy industry bottom out.

This month’s Business Conditions Monthly highlights residential investment – home construction and home improvement — of which the latter’s spending makes up about 30 percent. “While Americans may not be in the market for new homes, they are spending freely to fix up their current ones,” according to the report. “Low interest rates and a strong labor market should support new home construction, yet the rebound in residential investment overall remains moderate. Many factors are likely contributing to this, but one bright spot in residential investment is home improvements.”

The entire report is available to the public. You can read the report here.

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