Is The Summer Of 2011 Following A Different Script?

History isn’t repeating itself this summer. That may change, but for now the economy seems to be righting itself. Or perhaps it’s more accurate to say that the economy is finding some support. Granted, it’s tenuous and precarious, but it’s still better than the alternative. It was a different story a year ago, when the deterioration picked up a head of steam and trouble bubbled all the way through August. It’s still too early to rule out a repeat performance, but for the moment there’s reason to think that maybe, just maybe, the summer of 2011 will be better.

One clue is that the market’s inflation forecast is no longer falling. The implied outlook for inflation, based on the yield spread between 10-year nominal and inflation-indexed Treasuries, is higher these days. As of yesterday, the market is anticipating a 2.32% inflation rate, up from 2.18% on June 20. That’s a thin reed, of course, but beggars can’t be choosy. Consistently falling inflation expectations at this point would be a dark sign, just as it was a year ago. The good news is that the inflation outlook appears to be stabilizing after a modest fall. It’s worth noting that at this point a year ago, the inflation forecast was under 2% and it would continue dropping, reaching 1.5% by the end of August. This time around, the trend looks a bit better.

There’s also a sign of a relatively strong economy in the last full monthly profile of economic numbers, or at least relative to expectations from a few weeks ago, before all of May’s reports were released. As I noted yesterday, May was a surprisingly decent month for growth. That’s also a change for the better relative to the year-earlier comparison.
There was even a bit of good news in yesterday’s update of the S&P Case-Shiller home price index, which posted a small rise in April. The ailing housing market is still far from healthy, but perhaps the broad price decline is truly behind us. “The good news is that prices aren’t really falling that much more, but the bad news is that we are not seeing much of an increase in home prices yet,” Celia Chen, a housing analyst for Moody’s, tells the LA Times. “Until the market has worked through more of the foreclosure inventory, then home prices are not going to be able to increase.”
Even so, there’s still plenty of macro risk to worry about. The slight bit of optimism could evaporate quickly if the upcoming round of employment numbers disappoint. Recent data may compare well with the slump from a year ago, but all bets are off if the labor market doesn’t offer some positive confirmation.
Tomorrow we learn how last week’s initial jobless claims fared. The consensus forecast calls for a slight improvement, albeit at still-elevated levels that leave little room for comfort. The big number, of course, arrives on July 8, when the government releases the June employment report. If the pace of job growth continues to deteriorate after May’s dismal report, all the reasons for optimism noted above won’t mean much.