The June ISM report for the US non-manufacturing sector highlights that the economy continues to face an uphill struggle. Growth should improve, but will remain fragile and subpar for the foreseeable future.
The pace of U.S. economic growth should improve from the first half’s disappointing 2% pace. However, don’t get carried away with optimism. Business confidence remains very fragile, trapping the economy in a Catch-22 situation. Without faster job creation, consumer spending will stay under pressure and companies are in no mood to hire aggressively. This is highlighted by weak hiring plans among small businesses and the generally soft tone of the June ISM survey for the non-manufacturing sector. And the drop in ISM new orders does not suggest that “animal spirits” in the business sector are on the verge of a strong revival. The U.S. economy is following a classic post-financial crisis pattern of moderate growth, interspersed with occasional setbacks. This means that the Fed will stay on the sidelines until at least mid-2012. Low interest rates will continue to provide investors justification to be in risk assets rather than cash.
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