The good news is that consumer confidence recovered to the prewar level in April and held there through June. The bad news is that the level is below what would be expected at this stage of a recovery. Furthermore, consumers are now suffering through a second interruption of the recovery that is marked by prolonged weakness in the labor market. People believe that current economic conditions are barely above recession levels but expect an improvement to near normal in six months. Meanwhile, buying plans are steady for all durable goods except motor vehicles.

The monthly survey of industrial buyers by the Institute for Supply Management (ISM) has regained about half of the decline in manufacturing activity caused by prewar concerns. The balance is expected to come back in the second half of the year. The orders sub-index, typically a leading indicator, has already returned to 52. June's 49.8 reading indicates 'no change' from April in a market stagnant for more than a year. Goods purchases have increased more than 4% in eighteen months, but the added volume has been met largely by inventory withdrawals and imports.

The index of leading indicators increased 1.0% in May, the largest monthly gain since December 1992, which was the onset of the '90s long business expansion. At 111.6, May's index is the highest since this twice-interrupted recovery began in late 2001. However, the companion coincident and lagging indexes were nearly steady in May with both indicating that business activity has not yet picked up significantly despite an improved outlook. Manufacturing activity typically lags changes in the leading indicator by three to five months for consumer goods and longer for equipment.

Manufacturing output rose 0.1% in May after two monthly declines of 0.6%. Despite the uptick, output remains nearly 2% below the peak prewar level. Consumer goods production is 0.8% below last May and business equipment output is off 2.8%. Usually durable goods are relatively weaker early in an expansion, but this time it is non-durables that are off 1.8% from a year ago. Food, paper, textiles, apparel and plastics have lost business to cheaper imports from Europe, Canada and especially Asia. Computers and electronics are the only domestic industries to expand in the past year.