We are clearly in a time of slow growth, which was admittedly surprising given how the data were coming in around mid-April. As the Arouba-Diebold-Scotti Business Conditions Index shows, we seemed to hit an air pocket in the late spring and the loss of the temporary Census jobs has made things look even worse since then:
However, this does seem to be abating with regional manufacturing surveys turning up from a three month or so downturn. Additionally, jobless claims may be easing downward slightly again. For a brief time it appeared as though we would be heading back in the 500,000 range again, which would present serious problems. Additionally, despite rapid deleveraging by households, consumer spending has remained steady as balance sheets are being repaired. Auto sales in October appear to be OK by recent standards (and recent standards only) and weekly retail sales have been hanging in there. Nothing stellar to be sure, but hardly the stuff of nightmares.
Housing, of course, remains a potential problem as house prices are declining again and appear likely to retrench for some time. It is possible that a renewed decline in house prices may cause a shock to consumer spending as consumers desperately attempt to rebuild their balance sheets by radically curtailing spending. This is the problem of deflation as consumers become frightened of their collapsing net worth and retrench. If the renewed decline in housing prices is more rapid than expected, this is a potential risk.
Now, the one thing to be truly concerned about is looming cuts in public sector spending, particularly potentially drastic cuts from the federal government. We all know the story about state and local governments (I work in state government so I've seen it first hand) and their pain has already been felt both on the street and in the data. However, with the likely changes in Congress it is quite likely that extensions of unemployment benefits, Medicaid enhancements, and many other programs will be severely cut back, directly harming personal incomes and reducing employment. In a time of depressed demand, it is terribly difficult to see how this is stimulative. Without being political here, the only economic case for a fiscal contraction being stimulative is where there is an ongoing fiscal crisis that is causing elevated interest rates and therefore a general credit crisis. There it is possible to see how deep cutbacks in government spending can be stimulative. In our case, it is hard to see.