The first clues about June’s economic activity are in and the numbers leave room for optimism, but not nearly enough to eliminate worry entirely. Today’s reading on the services sector via the ISM Non-Manufacturing Report reveals a slower rate of growth last month. Meanwhile, the June reading on manufacturing shows that a slight increase in activity. The good news is that in both cases growth still has the upper hand, albeit at a lesser pace for services companies, which constitute the lion’s share of the private sector. Nonetheless, the idea that the summer of 2011 isn’t destined to follow the previous year’s dismal downturn remains alive and kicking. But the week’s ahead will surely test this faith.

Much depends on how the rest of the month’s numbers look. First up is tomorrow’s update on weekly jobless claims. Economists aren’t expecting much of a change, which means that elevated claims will continue to haunt the outlook for growth. The big number arrives on Friday, when the June employment report is released. The consensus forecast calls for a net gain of 110,000 private sector jobs, up from May’s disappointing 83,000. That’s an improvement, but if the forecast holds true it’s still too low to provide much confidence that the rough patch is over.
“The start-and-stop recovery we have experienced over the last year and a half is stifling the momentum necessary for business confidence to rise materially and hiring to gain traction,” Russell Price, senior economist at Ameriprise Financial, tells CNNMoney.
Nonetheless, the stock market’s optimism remains intact. That’s no guarantee, of course, but when we pair the rolling 12-month percentage change for equities with some other economic metrics, the trend still appears to have forward momentum. In the chart below, the annual change in the S&P 500 (red line) and the ISM Manufacturing Index (black) is updated through June. The latest numbers for durable goods orders (blue) and industrial production (green) are as of May.

Clearly, the stock market sees better times ahead. The ISM reading on manufacturing is suffering, but it’s perked up courtesy of the June report. The big mystery is whether industrial production, durable goods orders and other metrics will hold their ground in June. The stock market is inclined to think that we’ll muddle through. But before we pin our hopes on the crowd’s expectations as expressed through equities, we have to survive the next two days of employment statistics.
In short, we’re at a precarious point in the economic cycle…again. The real danger is arguably less about a new recession vs. a lesser level of growth that endures and thereby slowly strangles the economy. Deciding if that risk is more than a passing threat may get easier by the end of this week.
The hope is that the rough patch ends and brighter skies emerge. Is that feasible? Absolutely, says one strategist. “We’ve got this idea that we’ve really slowed down, but the actual inherent growth rate of the economy has sped up,” says Jim Paulsen, chief investment strategist at Wells Capital Management via US News & World Report. “It’s just being covered up by temporary forces.”
Perhaps, but if that’s true it’s not unreasonable to expect some inspiration in the next batch of employment numbers.