NEW YORK (CNN/Money) -
The U.S. economy has been a C+ student for the first half of the year -- not flunking out, exactly, but not posing any threat of making the honor roll, either, and certainly not living up to expectations.
Earlier this week, Alan Greenspan and other policy makers at the Federal Reserve decided again to leave short-term interest rates at already low levels. That's good news in many ways -- it gives people more money to buy stocks, cars, clothing, houses and more -- but it's also not what the Fed was supposed to have been doing at this point.
Earlier in the year, coming out of one of the shortest and mildest U.S. recessions since World War II, with the Fed's key short-term interest-rate target at a 40-year low, most analysts thought the economy would be rolling right along by now and that the Fed already would have started jacking interest rates back up to fend off inflation.
Now, almost nobody thinks the Fed will raise rates again until at least November. There's even speculation that it could cut rates one more time.
"The consensus was very upbeat on the economy improving in the second half of the year, very upbeat on the Fed tightening as the year progressed," said Rory Robertson, interest rate strategist at Macquarie Equities (USA). "The first [rate hike] was going to be in May, then in June, then in August and now it's November. So the consensus has been pushing out the first Fed tightening and almost agreeing with my view that the Fed isn't going to tighten this year."
In the statement accompanying its decision, the Fed described the economy as it has for several months -- it's recovering, but the strength of that recovery is still in doubt. That doubt has caused some economists to worry that the recovery will be "jobless," "profit-less" or otherwise anemic.
Here are some aspects of the economy the Fed will consider between now and its next meeting, scheduled for early August, together with the economy's grade in each area and how it's likely to do the rest of the year.
Consumer confidence: Despite everything -- terrorist attacks, a recession, more than a million job cuts, corporate accounting scandals, falling stock prices and more -- consumers have not given up.
The Conference Board's closely watched measure of consumer confidence jumped in March to nearly its August 2001 level and has hovered in that area for the past three months. The Conference Board, a private research firm, said this week that its index dipped in June, but was still reasonably high.
"The latest readings point to continued consumer spending and moderate economic growth," Conference Board consumer research director Lynn Franco said.
Still, with the University of Michigan's consumer sentiment index also reportedly dropping precipitously in June, it's clear that consumers are having a hard time digesting constant new terrorist threats and corporate scandals.
On the other hand, if the labor market recovers, and if there are no major terrorist attacks or other such global calamities, there would seem to be little reason for confidence to fall much further -- but those are big "ifs."
Consumer spending: Consumers also have kept spending, though not nearly at the rate they spent in the fourth quarter of last year or the first quarter of this year, and the rate of spending actually fell a bit in May. There's not much room for a big bounce, either, since there never really was a dip in spending, and consumers still are worried about jobs, slowing wage growth, debt and other woes.
Still, consumer prices are low and should stay low for some time, helping to ease the pain of slow wage growth. Retail sales fell in May, but seem to have bounced back so far in June. Auto sales are expected to stay at or above 16 million units this year, a robust pace. And, most importantly, the housing market is expected to stay strong, making consumers' balance sheets looking better and fueling more refinancing, which puts more cash in consumers' hands.
Business spending: The key to the strength of the recovery is business spending, and that's still uncertain. A slump in business spending after the boom of the late 1990s pushed manufacturing and then the whole economy into recession. Businesses still are not exactly in a buying frenzy -- and who could blame them?
"Many businesses see statistics showing economic growth as a cruel joke," Bill Cheney, chief economist at John Hancock Financial Services, said in a research note. "Competition is still brutal, wages are still rising, prices are still flat or falling, and profits are as hard to find as they were a year ago."
Labor market: With businesses worried about demand and profits, they're not in any hurry to hire new workers. The productivity miracle of the late 1990s has continued even through the recession, but it's come at the expense of the labor market, with companies getting more work out of fewer workers. Until there's a big boost in demand, the labor market is likely to stay tight.
But, to put the labor situation in perspective, unemployment still is far removed from the 7.8 percent it hit after the 1990-91 recession and not even close to the 10.8 percent peak following the 1981-82 recession. While worst-case scenarios see unemployment stagnating throughout the year, few economists expect it to go much higher than it is now.
Housing market: With yields on Treasury bond prices falling, mortgage rates have continued to plummet, encouraging more home-buying and driving home prices higher.
And most real estate economists have dismissed concerns of a bubble, saying housing supply is sufficiently low to keep the bottom from suddenly falling out of prices -- though they are expected to cool off from their level of strength earlier this year.
Manufacturing: This sector was the hardest hit by the downturn, staying in recession for 18 months. But both the nation's purchasing managers and the Fed have reported consistent growth so far this year. That's not pointing to robust business spending yet, exactly, but could be setting the stage for it.
"The recession was largely centered in the manufacturing sector, and that is where we continue to see the strongest signs of recovery," Wachovia Securities economists John Silvia, Jay Bryson and Mark Vitner said in a research note.
Stock market: Terrorist fears, violence in the Middle East and Kashmir, and almost daily revelations of corporate accounting hijinks have kept stocks weak. It's tempting, in fact, to give U.S. stock markets an "F," but they haven't totally collapsed yet -- they've just turned the clock back to 1998.
The stock market is usually a leading economic indicator, but most analysts think its current weakness seems to have little to do with economic fundamentals. On the other hand, if weakness continues, it could have a dampening effect on consumer and corporate confidence.
Dollar: Weak equity markets and uncertainty have also hurt the dollar. This is good for exporting companies such as Procter & Gamble Co. (PG: Research, Estimates), but a sudden dollar collapse could be disastrous for the economy. Though that's not likely to happen any time soon -- the dollar is probably just returning to a more natural level after a big build-up in the late 1990s -- its lingering malaise could weigh on U.S. stock markets for a while.
"If this represents the start of an extended [dollar] slide, it may erode the attractiveness of dollar investments to foreigners and remove an important component of the demand for U.S. financial assets," Cheney of John Hancock Financial Services said.
Overall: Despite the gloom, the economy still is expected by many economists to turn in a better performance than 2001's 1.2-percent growth in gross domestic product (GDP) -- possibly anywhere from 2 to 3 percent. That's not the A+ performance of the late 1990s, but it's a passing grade.