Optimism concerning the U.S. economy is colliding with awkward, but not entirely bad, realities. At the bottom of an economic cycle, different parts of the economy splinter into diverse positive and negative levels of performance based on their stages in the cycle.

Labor Markets and Non-Residential Investment Lag the Cycle

For example, labor markets continue to feel the pain from company downsizings. In June, U.S. job losses approached half a million after moderating to “only” -322,000 in May. From late summer on, job declines should ease, but they are not likely to disappear until the turn of the new year. The unemployment rate seems assured to rise above 10%.

While housing construction starts are stabilizing at a low level, non-residential starts are plummeting. Similar to hiring, this is a sector that lags in the cycle. Profit-challenged firms and tax-revenue-strapped government bodies postpone investment projects.

According to the statistical report from Reed Construction Data (RCD), non-residential building starts were -68% in June 2009 versus May 2009 and -77% versus June 2008. Civil and engineering starts were -77% month over month and -79% year over year. First-half non-residential building starts in 2009 have been -28% compared with January to June of last year and engineering starts have been a less negative -8%.

Retail Sales are Improving

Retail sales, mainly due to price bargains, are showing signs of life. Sales and production levels are also getting a boost from inventory adjustments. Total U.S. retail sales in June recorded a 0.6% month-to-month gain, which followed on the heels of a 0.5% increase in May. Prior to that, they were negative in nine out of the preceding 12 months.

Year-over-year retail sales remain depressed at about -10%. But at least they are not falling as they did throughout 2008. They have flat-lined at -10% for the past six months. Auto sales are starting to trend upwards again, as GM came out of bankruptcy in a flash, as Chrysler did before it. Time spent in Chapter 11 has been shortened to a minimum.

The phase of the cycle for different construction types is also showing up in retail sales. As residential starts bottom out, furniture and fixture sales, on a three-month smoothed basis, are trending up slightly. But building material and supply store sales, that extend across a wider range of construction types, are still heading down (see graph below).

Washington’s Aggressive Agenda Poses Questions

As a final comment, the aggressive agenda of the new administration in Washington is contributing uncertainty in two key areas. First, what will be the direct costs to business and the passed-on costs to consumers of new environmental cap and trade regulations, if they are passed by the Senate, having already been cleared by the House? And second, in the event that a form of universal health care is adopted, how will medical practitioners be compensated and how will employers and employees structure their medical plans?

U.S. Retail Sales – Three Months Smoothed

U.S. Construction-related Retail Sales – Three Months Smoothed

*"Year over year" is each month versus the same month of the previous year.
Based on latest three-month averages of current dollar adjusted data (and placed in latest month).
Adjustments are for seasonal variation, holiday and trading day differences, but not for price changes.

Data source: U.S. Census Bureau (Department of Commerce).
Chart: Reed Construction Data - CanaData.