Interrupting Your Reported Data Distortions: More Darkside for the Economy
We're interrupting your regularly scheduled data dumps of economic data, and our planned posting
schedule, to bring you this special bulletin about what yesterday's GDP numbers really said. First off there were not just huge revisions but a complete re-factoring of the data. This is not, and for the record, some nefarious government plot (though it will again be taken that way) which resulted from better data and revisions stretching back decades. Which made, among other things, the '01 downturn much milder and this one must worse. More importantly our recurrent theme of needing to really look into things needs re-emphasizing because the reported headlines are based on QtQ data instead of YoY and when you look at properly are much worse than anybody is telling you. The fact that mis-interpretations and resulting distortions are beyond widespread, beyond endemic and would appear to be innate is another critical factor.
This morning's WSJ put it all very nicely in historical context though by comparing the decline in GDP to previous downturns since the end of WW2 with this nice chartporn. We'll dig into all this graphically because it's critically important but what you need to know is the headlines reported QtQ changes over the last three quarters in real GDP of -5.4, -6.4 and -1.0%. Which gives great weight to the fantasies of a V-shaped recovery. In actual fact, on a YoY basis, the last three quarters were -1.9, -3.3 and -3.9%. Let me repeat that - REAL GDP WAS DOWN IN Q209 BY ABOUT -4% !!! If you take out the effects of trade (exports were down -15.7% while imports dropped further by -18.6% and net exports as a whole were -28.7% YoY. That last number is a slight improvement over the previous -29.8%) GDP x-Trade was down the last four quarters by -1.1, -2.5, -4.4 and -4.7%. Let's try that again too...DOMESTIC GDP WAS DOWN ALMOST -5% !!!!!. No way, shape or form that one can read those as good numbers. Nor can one argue that they show much flattening of the rate of decline, or bottoming out. The QtQ numbers do tell us that we're in the process of crossing that cusp point though and we'd expect to see better numbers in the next few quarters, at least in the sense that the rate of declines drops. Positive GDP improvements are a ways off, significant positive GDP improvements farther, growth in employment and investment and the return of a naturally growing economy is much...much...much farther off. In fact the Fed expects that after a bump up the long-term outlook is for an average growth rate of 2.4% - that's barely breakeven on required new job creation and means we're going to have an organically weak economy - thru 2015 and beyond.
Letting the Real Economy Stand Up
Let's put all that in context with this graphic so you can what the data really says and how it looks in comparison to the last two decades plus (we'd go back farther but the structural revisions of the data are a work in progress and it'll be some time before it's completed and we can rebuild all our spreadsheets). There's a pernicious meme in wide circulation, mostly driven by deliberate distortions for political purposes, that the stimulus program isn't working. In actual fact about $300B of tax cuts and transfer payments have already gone out the door and have been what's kept state and local disasters from turning into catastrophes. A very rough cut of GDP, with and without Federal spending, shows the downturn would have been significantly worse. NB: that initial $300B is about all that could be shoved out the door and actually work. NB2: and the pace, timing and structure of the program thru the rest of this year and thruout next, on which continuing to keep the wolves at bay depends, is beyond what the operational capabilities of the federal departments can handle; in other words about all that can be done is being done. (Realities vs Rhetorics: Economy, Policy, Real Data). Understanding the real data is critically important but it would appear that understanding how it's being mis-reported and deliberately mis-represented is even more so. Without Federal spending YoY GDP growth would have been -0.6, -2.7, -4.0 and -4.7% the last four quarters. In other words the economy was almost a full percentage better than it would have been otherwise in Q2.
The Real Outlook: Consumption, Investment and Implications
Current consumption tells you how the engine of the economy is doing, investment (real estate and business) tells you how it's likely to be doing and the combination of wages and employment tell you how the future is likely to evolve. The second chart above shows us that Consumption is still bad but it leveled off somewhat, instead of following over the cliff with GDP as it usually does. For the last four quarters real Consumtion was -0.7, -1.8, -1.5 and -1.8%, so it's bumping along a bottom for now. That is its not getting better but it's stopped getting worse - in some significant part because of stimulus. Employment on the other hand is dropping like cliff-diving lemming, along with GDP.
Consumption drives future business expectations which in turn drive hiring and investment decisions; which, in turn, feedback on consumption decisions. With consumption still very weak and employment dropping we'll be lucky if demand holds up which means investment and hiring will be constrained for a long time. Take a careful look at investment in this second composite - it sharply peaked in early '04 and began declining immediately. The first thing that tells you is one of the major reasons we had a very weak and jobless recovery - the organic feedback loop never caught and the engine was just sputtering along with poor capex spending and hiring. Then it started falling rapidly until it went cliff-diving very early in '08. The last four quarters were -8.1, -12.5, -25.2 and -27.4% YoY ! Investment dropped by almost 30% in Q2 !! Residential investment generally leads the business cycle and this last time housing price bubbles led to sustaining Consumption on the back of the Housing ATM. That's created a long-term structural problem where excess inventory will have to be worked off, where Housing won't recover as it normally does and where the ATM is never coming back. Business spending fell -6.0, -17.4 and -19.6% the last three quarters. Again the start of a bottoming process but -20% is a LONG way down in our book.
Investment and Future Demand
In this third composite the top part breaks down Investment into its two major components so you can the RI and Business pieces separately. (Again the revisions to the reported data and the on-going updates make the earlier data a little squirrely, technically speaking, but the recent data appears reliable.). In the top of this graphic you can see how the cliff-diving real estate drop preceded the overall downturn and then how business spending has followed it off a cliff. With all this in mind (the worst downturn, preceded by a jobless "recovery", VERY poor business spending prospects) we can probably say that getting back to 2.4% growth would be an optimistic outcome.
The next question is how is the Consumer going to react, now and in the future. Remember no more stock market or housing bubbles to subsidize consumption. Then there's the re-balancing and de-leveraging of consumer balance sheets - the fuel that drove the engine the consumption engine for three decades is being taken away. Now at this moment in time consumption depends, and will depend, on incomes and nothing else. The best indicator of that is the combination of real wages and employment. In the second sub-graphic here you can see where real wages have jumped up as inflation has dropped. But you can also see where job market pressures are beginning to impact wages. Meanwhile of course Employment is in terrible shape, and given normal business cycle behaviors in combination with terrible job creation prospects, will worsen significantly (at least 10% Unemployment and likely worse) and will be followed by a really terribly jobless non-recovery. At 2.4% growth businesses will NOT be hiring nor investing much.
What's Really Going On
This rather large and complex composite puts together four different graphics we've put up several times and like to re-use because they tell the complete story. One of the advantages of ideographic languages like Chinese is that the characters also tell a story because they are pictures. Think of this graphic as four ideograms that also form a fifth, master, picture of how the major currents are playing out all together inter-actively. First you have the business cycle where Consumption drives business spending and hiring but both Consumers and Business decide based on income, prospects and funding/borrowing. As we cycle around this feedback loop, which can be either virtuous or vicious (and we're in a vicious one indeed), the economy oscillates like a wave pattern.
But we have some deep-seated structural feedback problems where Credit Markets sustain or constrain how the economy does. They are self-repairing in the sense that collapse is no long immanent (make no mistake last Fall and this Winter that was NOT a given - Bernanke, Paulson and Geithner saved Western Civilization). So Credit and Housing are still in trouble but the US Economy is, as we've just been pounding away at, in deeper trouble. As it happens, not matter what you here in the headlines, the International Economy is much worse. Partly because Japan and Europe are in the deepest dodo but also because China's reported growth is still not good enough to breakeven on job creation requirements. It's not an accident that so many serious civil disturbances have been breaking out, getting bigger, more serious and widespread. And also because China acted fast and well but has created terrible problems for the future by pumping too much money that moved out of their credit system into bad loans.
The bottom left-hand chart pulls all this together and tells you where we think we're at in the cycle and what the alternative paths were and are. A shallow V-recovery is out of the question. Depression 2.0 has been avoided, so far ! Judging by GDP one could estimate we're at the beginnings of a bottoming process. But, especially with poor future growth prospects, the continued deterioration and poor future prospects for Employment - which is IOHO the best gauge of overall economic health - has not begun that process yet.
There's a log of pain to come and our long-term condition will be chronically poor for a longer-time, even if we manage to start putting together positive growth on a sustainable basis.
U.S. Economy Pulls Out of Tailspin The U.S. economy came out of its tailspin in the second quarter and may be poised to resume growing, even as new signs of economic strain showed up in Europe. U.S. gross domestic product -- a broad measure of the value of goods and services produced -- contracted at a 1% annual rate last quarter, its slowest pace in a year. That was a marked improvement from the first-quarter contraction of 6.4% and the fourth quarter's 5.4% pullback. Mr. Maki expects the economy to grow at a 2.5% annual rate in the third quarter and a 3% rate in the fourth quarter. Several economists raised their forecasts after the most recent report; JPMorgan Chase, for example, revised its projection for the third-quarter growth rate up to 3% from 2.5%, citing the fall in inventories. The White House wasn't predicting clear sailing ahead, however. "As far as I'm concerned, we won't have a recovery as long as we keep losing jobs," President Barack Obama said Friday. Though the U.S. trade position has improved and buffered the recession, new signs of stress emerged among key U.S. trading partners. Unemployment in the euro-zone economies rose to the highest level in a decade and consumer prices there fell, a worrisome sign of deflation that emerges when demand is so weak that businesses can't raise prices. New government revisions to U.S. growth data showed what most Americans already suspected: The current recession is the worst since World War II. Since economic output peaked in the second quarter of last year, it has fallen by 3.9% -- the steepest decline since the government began keeping quarterly figures in 1947.
Revised Data Soften View of '01 Slump The current recession turns out to be worse than previously thought, while the 2001 recession was milder than earlier reported. Those were two conclusions from wide-ranging data revisions released Friday by the Commerce Department's Bureau of Economic Analysis. Data for the 2001 recession had shown that the nation's gross domestic product declined 0.2% from the fourth quarter of 2000 to the third quarter of 2001. On Friday, the government said GDP actually grew 0.1% during the recession. The current downturn is much different. Revisions show that from the fourth quarter of 2007 to the first quarter of 2009, inflation-adjusted GDP dropped at a 2.8% annual rate, compared with the 1.8% drop reported previously. The decline continued in this year's second quarter, producing the worst recession since World War II. The government initially reports the nation's GDP a month after a quarter's end. That makes the figure a rough estimate. It updates the estimates in the following months, and conducts comprehensive revisions every five years as new data arrive. Many economists consider a recession to be two straight quarters of declining GDP, but that didn't happen in 2001. Economic activity bounced around in the first nine months of 2001, with a 1.3% decline in the first quarter, a 2.6% rebound in the second quarter and then a 1.1% decline again in the third quarter.
Falling Imports versus Falling Exports (GDP = -2.38%) I noted earlier that the oddity of imports versus exports calculation would produce a positive contribution to GDP. Let’s look at the details of this, and find a way to understand what this means. First, off conceptualize the difference between what imports and exports are. At the most basic level, Imports represent our consumption of overseas production, i.e., We buy what they make. Exports are where overseas consumers purchase our production, i.e., They buy what we make. What were the specifics of the GDP data regarding import/export? -Real imports of goods and services decreased 15.1% -Real exports of goods and services decreased 7.0% So in Q2, both consumption by us of overseas goods and services and by them of US made goods and serivces declined significantly. The Differential between imports and exports — who dropped fastest — was the key to this quarter’s GDP data. According to Bloomberg, Decreasing Exports subtracted 0.76% from GDP. At the same time, falling Imports added 2.14%. Net contribution of the fact that Imports are free falling twice as fast as Exports are = 1.38%. If they were both falling at the same rate — if Europe and Asia’s consumers were hurting as much as ours – GDP would have been -2.38%.
If it seems weird to you that the ratio of domestic and overseas shrinking economies and their reduced consumption somehow turned into a positive GDP contributor, well, welcome to the wonderful world of government statistics.
Revisionist History, by the Numbers Tomorrow, we get two big changes. The first is the granddaddy of revisions. Using better data than was available before, the Bureau of Economic Analysis will revise the growth figures going back to 1998. That will let us know if this recession began more severely than we thought. We may learn that growth was negative in some periods when we thought it was positive, or vice versa. The second change will be in a lot of definitions. The way they divide up personal consumption expenditures will change significantly, going back decades. That change will not change the total expenditures — at least before inflation adjustments are applied — but it will change the way the figures are split up.
Deeper Than We Thought The recession was worse than we had thought, or at least worse than the previous G.D.P. numbers seemed to indicate. From the fourth quarter of 2007 through the first quarter of 2009, we had been told the G.D.P. fell at an annual rate of 2.8 percent. The new number is 4.3 percent. What made the difference? In general, the things we thought were bad turn out to have been worse. Personal consumption spending was lower than we thought, falling at a rate of 2.1 percent rather than 1.5 percent as previously reported. That was largely due to the decline in spending on durable goods — such as cars and furniture. Instead of falling at a rate of 11.5 percent for the period, we are now told the rate was minus 13.5 percent. Every type of investment — from housing to equipment — was also worse. We thought residential investment fell at a rate of 34.5 percent. Make that 35.9 percent. We thought spending on nonresidential structures fell at a rate of 9.4 percent. Make that 13.1 percent. On the other side, foreign trade was better than previously reported, and the federal government’s military spending rose more rapidly than we thought. But nonmilitary spending rose a little less than previously reported, and state and local government spending declined faster than previously reported. To balance that off, at least a little bit, we are now told that from the third quarter of 2001, when the G.D.P. reached its lowest level in the 2001 recession, through the fourth quarter of 2007, the economy grew 18.1 percent, rather than the previously reported 17.7 percent. On an annual basis, that raises the growth rate in the last last up cycle from 2.645 percent to 2.696 percent. And in case you are wondering, the revisions for all the previous years added up to a small net positive. On an annualized basis, the real growth of the American economy from the first quarter of 1947 to the first quarter of 2009 was 3.257 percent, not the 3.243 percent previously reported.
Three in a Row For the first time since 1954, nominal G.D.P. has fallen for three consecutive quarters.
GDP Revisions: Deeper 2008-09 Contraction, Milder 2001 Recession The latest recession, it turns out, is even worse than previously reported. And the 2001 downturn that plagued the job market for years? It now barely registers as a sustained contraction in economic output. Alongside the second-quarter report on gross domestic product, the Commerce Department’s Bureau of Economic Analysis today released revised estimates of economic data going back to 1929. The BEA’s comprehensive revision to its National Income and Product Accounts shows an average annual growth rate of 3.4%, 0.1 percentage point higher than previously published estimates. From 1997 to 2008, the economy is shown growing at a 2.8% rate, also 0.1 percentage point above its earlier figure. The update moves the current recession past the late-1950s downturn as the worst (in GDP terms) since the Great Depression. (Of course, the 2009 data could be revised next summer so you can’t say for sure.) The BEA now says inflation-adjusted GDP increased just 0.4% in 2008. Earlier estimates had put the growth at 1.1%. GDP is now shown dropping in last year’s first quarter (reported earlier as a gain), posting a smaller gain in the second quarter than shown earlier, a larger drop in the third quarter and a slightly-less-large tumble in the fourth quarter. From the fourth quarter of 2007 to fourth quarter of 2008, real GDP is shown dropping at a 1.9% annual rate compared with the earlier estimate of 0.8%. The first quarter of 2009, which last month had been estimated as declining at a 5.5% annual rate, now shows an even worse 6.4% decline due to the benchmark revisions. That matches the first-quarter 1982 decline, but is still slightly better than the 7.9% drop in the second quarter of 1980. The government’s comprehensive revisions are carried out every five years to update the NIPA accounts with new data from government agencies (such as the Census Bureau and IRS) and outside sources. This year, as we told you earlier, the BEA is changing some of its definitions and moving items around on the NIPA tables The 2001 recession registers as even less of a contraction when measured over the full course of the downturn. From the fourth quarter of 2000 to the third quarter of 2001, real GDP increased by 0.1% under the revised figures due to a smaller contraction in investment spending. The earlier estimate showed it dropping 0.2%. Both are essentially flat, but the new figures should renew debate about the conventional GDP measure of a recession (versus the broader look at other data by the National Bureau of Economic Research). The first quarter of 2001 declined at a 1.3% annual rate, followed by a 2.6% gain in the second quarter, a 1.1% decline in the third quarter and a 1.4% gain in the fourth quarter. The BEA says earlier business cycles show little revision.
Economists React to G.D.P. Report Here is what economists had to say about this morning’s report about a less-than-expected decline in the nation’s gross domestic product in the most recent quarter:
“The path to recovery remains a long haul, with more disappointments likely in the months to come. The contraction — though less severe than most forecasts — offers no sign of a V-shaped recovery. Consumer spending came out worse than expected and is likely to remain weak into the third quarter because of ongoing clogging in income and credit channels. The very rapid decline in inventories raises hopes for a recovery in industrial production, but also increases chances of a pushback later in the year as domestic and global markets remain weak. With capital spending still falling and unemployment rising, neither investors nor workers are likely to see strong rewards anytime soon.” — Bart Van Ark, chief economist, The Conference Board
“Three components account for virtually all of the relative improvement in the second quarter. A surge in exports narrowed the trade deficit and added 1.38% to the second-quarter report. A spike in government spending added 1.12% to April-June real G.D.P. And a decidedly slower pace of inventory liquidation reduced the drag from this key G.D.P. category. The second-quarter report did, however, mark the first time in the postwar period that real G.D.P. has declined for four consecutive quarters. The composition of the second quarter real G.D.P. report supports our call that the business cycle will not bottom until later this year.” — Steven Ricchiuto, chief economist, Mizuho Securities USA
“The downward revision helped explain the severity of job losses in the economy but I don’t think the G.D.P. report tells us anything different about the outlook from here — mainly that inventory adjustments are very far along which should mean that factories will be starting back up. In fact there’s evidence of exactly that all around the world. We’ve had much better manufacturing data in Japan, in Germany, in non-Japan Asia, and just this morning in the U.S. ticking back up just as the market expected. I view the G.D.P. report as confirmation of the severity of the downturn but I don’t think it changes the story going forward.” — Stuart Schweitzer, global market strategist, JPMorgan Private Bank
“Unlike those analysts arguing that we will see a robust ‘V-shaped’ recovery, however, we believe the boost to real GDP during Q3 will be fueled more by transitory factors, and that the longer-term outlook is for a fairly tame recovery.” — Richard F. Moody, chief economist, Forward Capital LLC
The Great Recession: A Downturn Sized Up What makes the current recession so bad? Other downturns have been more painful by some measures, but none since World War II has delivered so many severe blows to the economy at the same time. Already it is the longest. The nonprofit National Bureau of Economic Research, which determines when the U.S. economy slips into recession, says the downturn began in December 2007, 19 months ago. That makes it longer than the wrenching, 16-month recessions of 1973-75 and 1981-82. The unemployment rate is approaching the peak seen in the 1981-82 recession and the scope of job losses is the worst since the 1948-49 recession. The decline in gross domestic product is the deepest since the 1957-58 downturn, and Americans haven't seen so much of their wealth evaporate since the Great Depression. With a dwindling number of people who remember the Great Depression, the 1981-82 recession is many Americans' high-water mark for economic pain. To tame the era's rampant inflation, the Federal Reserve pushed short-term interest rates above 20%, slamming the brakes on the economy. Millions lost their jobs, lifting the jobless rate to 10.8%. Last month, the unemployment rate hit 9.5%. But most economists forecast it will keep climbing even after the recession ends because businesses will remain cautious about hiring. Making matters worse, the economy needs to add some 100,000 jobs a month to keep pace with population growth. While the unemployment rate isn't yet as high as in the early 1980s, the job losses associated with this recession already have been deeper because the downturn started with a lower unemployment rate than in the 1981-82 slump. Last month, there were 6.7 million fewer Americans working than in December 2007, when employment peaked -- a 4.7% decline, compared with 3.1% in 1981-82. "In terms of employment, we're now way past 1982 and we're just about to cross the worst postwar recession, which was 1948," says Stanford University economist Bob Hall, who heads the NBER's recession-dating group.
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Help Wanted for Market Recovery Are markets taking too rosy a view of unemployment? Joblessness is usually seen as a lagging rather than a leading economic indicator. In the last two U.S. downturns, firms continued shedding jobs for months after the recession was officially over. Typically, companies only start hiring in earnest once a recovery is clearly under way. But this time, unemployment may play a bigger role in determining the timing and shape of recovery. Markets are betting the old orthodoxy still holds sway. Unemployment has climbed quickly. The U.S. rate hit 9.5% in June. That is higher than at any point since 1983 and, up from 5.6% a year earlier, represents one of the steepest annual increases on record. In the euro zone, May's 9.5% rate was the highest in 10 years. The Organization for Economic Cooperation and Development forecasts rates of 10% in the U.S. and more than 12% in the euro zone in 2010. But that hasn't stopped equity markets rallying strongly, amid growing hopes of an economic recovery this year. That is partly because job losses and other cost cuts have provided a cushion for corporate profits. According to Deutsche Bank's calculations, 82% of the S&P 500 companies to report so far have beaten second-quarter earnings expectations. The snag is that only 50% have beaten sales targets. For the moment, earnings are only being held up by costs shrinking fast alongside revenue. For a true recovery, sales need to start growing, too. Rising unemployment may make that harder to achieve. First, the flip side of better-than-expected corporate profits is real financial and consumer pain. U.S. credit-card bad debt, for example, is rising faster than unemployment. Annualized write-offs of securitized credit-card debt hit a record 10.8% in June, according to Moody's. The agency expects that to rise to 12% to 13% in mid-2010. That leaves the risk of a nasty feedback loop: Continued downward pressure on sales provides further impetus for companies to cut jobs, leading to more losses on consumer debt -- and more economic pain.
Squeeze on Pay, Benefits May Crimp Recovery The economy may be on the cusp of a recovery, but workers may not be anxious to step up spending, in part because employers are keeping a lid on salaries and benefits. The Labor Department's Employment Cost Index -- a broad measure of worker compensation ranging from health benefits and 401(k) contributions to hourly pay -- was up 1.8% in the second quarter from a year earlier for civilian U.S. workers. For private-sector workers, the index was up 1.5%, the smallest annual increase since the government began tracking the data in 1980. Public-sector workers have fared much better. State and local government workers saw their compensation increase 3.2% in June versus 3.5% a year earlier. The increase in benefits actually accelerated, to 3.6% from 3.5% in June 2008. The compensation changes calculated by the Labor Department aren't adjusted for inflation, which moderated over the past year and cushioned the wage impact on workers. The squeeze on benefits has been especially stark, according to the federal government statistics. After registering a year-over-year increase of 7% in 2004, benefits for private-sector workers were up just 1.3% in the second quarter from a year earlier. They have grown at an annual rate of less than 1% during the first six months of the year.
Skeptics Continue to Abound As the stock market consolidates its recent gains, lots of professional commentators continue to toss brickbats at the notion of a decent economic recovery or a sustained bull run in stock prices. Here are some recent samples:
Harm Bandholz of UniCredit says: “Are we facing a double-dip recession?” He trots out comparisons to the brutal double-dip recession of the early 1980s. He notes that the oil prices and inventory draw down and rebuilds mimic what happened back then. He does note, however, that a double-dip recession is not his base case, but rather a “W” shaped recovery that won’t be particularly fun. Ian Shepherdson at High Frequency Economics notes that consumer confidence is rising and home sales may be turning, but that’s nothing to get terribly excited about. The consumer, key to any real recovery, still faces horrific debt problems and won’t be spending anytime soon. “Don’t be seduced by rising consumer confidence,” he writes. “People need cash as well as confidence if they are to go shopping, and cash will be in very short supply for much longer than in a normal economic cycle.” MF Global extols the recent decent earnings and notes the many positive surprises. But at the same time, it warns that “earnings expectations may rise too quickly and exceed reality.”
Recovery to Hinge On Businesses After registering its steepest downturn since the end of World War II, the economy looks poised to start growing again. But with consumers expected to keep a tight lid on spending, a recovery hinges greatly on how businesses behave in the months ahead. If they stop slashing their inventories and investment, it could mark the first legs of an upturn. Business showed some signs of healing in the government's report on second-quarter gross domestic product, but executives remain very cautious. Investment in equipment and software contracted at a 9% annual rate for the quarter after collapsing at a 36% rate during the first three months of the year and a 26% annual rate in the final three months of 2008. Exports contracted at a 7% rate, after tumbling by 30% and 20% in the two previous quarters, respectively. And executives might have moved about as far as they can go to pare their inventories, cutting them at an annual rate of $141 billion in the second quarter and $114 billion in the first. By selling off goods they held in inventory, companies needed to produce much less. Now with stocks running bare, firms could be in a position to increase production again. But executives are broadly cautious about the outlook, and many doubt a robust upturn is at hand. "We're chasing every nickel," says Ron Mager, president of machine-tool dealer Machinery Systems Inc., in Schaumburg, Ill. When his orders dried up last year, he cut his work force down to 68 people from 78 people. Conditions are looking up now, but not enough to convince him to start rehiring aggressively. "I expected July to be a disaster," he said. "It's always our slowest month -- there are plant shutdowns even in good times. And July was our best month of the last four." Though not yet convincing, improvements in the business landscape stood in contrast to consumer behavior in the second quarter. As the unemployment rate soared to 9.5%, households cut back. Consumer spending contracted at a 1.2% annual rate after rising slightly in the first quarter. The combination of consumer and business caution means that the economy will grow only slowly, said Goldman Sachs economist Edward McKelvey. On the one hand, consumers will remain wary of spending until they see the labor market stabilize and paychecks increase. On the other, companies tend to take their cues from consumer spending. "We're not going to have a strong recovery," Mr. McKelvey said. "It's likely going to be a pretty sluggish affair."