What to make of mixed economic signals

Consider some of the economic data we've seen this week.

On the Positive side:

• US core PCE up an annualised 1.9%.
• Inflation-adjusted after-tax incomes rose 0.3% in June, the first increase since March.
• Personal savings rose to 0.6% of disposable income in June.
• Pending Home Sales rose 5% in June.
• Consumer confidence leapt to its highest level since just before the 9/11 attacks.

The Negatives:

• Home prices fell 2.8% year over year.
  
• Real spending on durable goods fell 1.6%
• Construction spending fell 0.3% in June.
• The Chicago purchasing-managers' index dropped to 53.4%
• Private-sector jobs rose 48,000 in June, the weakest since 2004.
• ISM index fell to 53.8% in July, down from 56.0% in June, the first decline in 4 months.
• Auto Sales down 12% from a year ago.
  

Certainly 3Q07 is shaping up as weaker than 2Q07, exactly how much weaker is yet to be seen. Economists are suggesting moderate growth going forward.

Whilst that may seem like a reasonable conclusion based on traditional economic measures the one element that seems to be missing from current analysis is the impact the financial sector will have on the economy in the coming 6 - 12 months.

The health of the financial sector has always been a reasonable proxy for the overall health of the US economy. The impact of tighter credit is already being seen in the almost defunct LBO market.

The bursting of the housing bubble continues to take its toll on Home builders and mortgage provider earnings. In time this will spread to other financials such as brokerage houses through diminished fees, higher provisioning and possible write-downs.

Credit problems attached to sub-prime are emerging from all corners of the globe. Sub-prime has become a dirty word and Alt-A is now starting to take on similar tones.

Volatility is back in a big way and whilst sentiment may not have seen a reversal just yet investors are becoming more easily rattled by negative news. Expect a bumpy rise in the coming months.