From the Fed:
Information received since the Federal Open Market Committee met in April suggests that the economic recovery is proceeding and that the labor market is improving gradually. Household spending is increasing but remains constrained by high unemployment, modest income growth, lower housing wealth, and tight credit. Business spending on equipment and software has risen significantly; however, investment in nonresidential structures continues to be weak and employers remain reluctant to add to payrolls. Housing starts remain at a depressed level. Financial conditions have become less supportive of economic growth on balance, largely reflecting developments abroad. Bank lending has continued to contract in recent months. Nonetheless, the Committee anticipates a gradual return to higher levels of resource utilization in a context of price stability, although the pace of economic recovery is likely to be moderate for a time.
Let's break this down into smaller parts:
Household spending is increasing but remains constrained by high unemployment, modest income growth, lower housing wealth, and tight credit.
We've seen PCEs and retail increase for the better part of a year. But these increases are coming off of very low levels caused by the recession. In addition, there is little reason to think we'll see robust increases in this number given the unemployment and income situation.
Business spending on equipment and software has risen significantly; however, investment in nonresidential structures continues to be weak and employers remain reluctant to add to payrolls.
About half of the investment equation is solid. Businesses are increasing in capital areas that increase productivity. Commercial real estate is still in poor shape and businesses are still reluctant to hire.
Housing starts remain at a depressed level.
And they will for the foreseeable future. As NDD and I highlighted a few days ago, housing is still suffering from a massive inventory overhang.
Financial conditions have become less supportive of economic growth on balance, largely reflecting developments abroad.
Europe is a problem. I think we figured that out. The real question is what is the depth of the problem. Should the EU's policy response continue to develop positively, I think we'll be OK. The main problems is they are trying to coordinate a $1 trillion dollar plan by building a consensus in the EU community -- an obviously difficult task.
Bank lending has continued to contract in recent months
Yes it has. But that is normal. Consider this chart from the St. Louis Federal Reserve:
First, the chart is in logarithmic scale. While the depth of the latest contraction is sharper, it is normal for credit to contract at the beginning of the expansion. In other words, the latest contraction is hardly a new or historical development.
