Image: Anthony Mirhaydari

Anthony Mirhaydari

There's nothing like a presidential election to make everyone hypersensitive to what's happening in the economy. Republican challenger Mitt Romney pretty much wants things to fall off a cliff so he can gobble up votes. President Barack Obama wants the opposite, while pinning any blame on Republicans in Congress. Political operatives pounce on each data point -- such as last week's mildly disappointing jobs report.

America's economy is being pulled down as much of Asia hits the skids and a growing chunk of the eurozone falls into a technical recession. The June Institute for Supply Management report on factory activity issued last week showed its worst result since the recession ended in June 2009. Job growth has become anemic, with a second-quarter monthly average payroll gain of just 75,000 -- down 70% from the 226,000 average pace seen in first quarter. Retail sales have stalled.

But evidence suggests that, for now, America will avoid falling into an outright recession this year. Sorry, Mitt.

Oh, it could still happen eventually -- and early 2013 will be a critical period, given the fiscal cliff the nation is facing. (More on that later.) But rays of light are beginning to shine through, and they should, for the next few months at least, keep the darkness at bay. Let's take a look.

Reasons for hope

For one, the recent spate of poor U.S. economic data is merely catching up to other countries' poor data. Indeed, while U.S. factory activity disappointed, data out of China, Australia and Europe surprised to the upside slightly. According to Credit Suisse, last month's dramatic drop in the ISM factory new-orders index -- which fell to April 2009 levels -- merely brought the measure in line with its economic models suggesting growth of gross domestic product of around 1.1%, instead of the 1.9% suggested by earlier data.

Also, investor sentiment remains very, very negative, with many betting heavily against risky assets (such as the euro) and piling into defensive assets such as U.S. Treasury bonds, while, according to the latest futures data, big commercial traders are taking the opposite side of those trades. Historically, when this has happened and the economic data have disappointed to the extent they do now, the stock market has been near a major trough. Recent examples include August 2011 and September 2010.

There's more. The housing market, while not fully healed, has stabilized. Prices are firming. The gap between supply and demand has narrowed. And a red-hot rental market -- since people who can't get or don't want mortgage financing in this environment still need places to live -- is encouraging new construction of multifamily units.

Indeed, Bank of America Merrill Lynch economists expect new housing construction to increase about 20% this year, which, when combined with an uptick in renovation work, will add 0.2% to GDP growth. That's the first positive contribution for the sector since 2005. And while they don't see the final low for home prices until 2014, we're definitely on the right track -- especially if the Federal Reserve starts to actively push down borrowing costs by buying mortgage-backed securities later this year, as is widely expected.

Household finances are getting better, too, as people use any means necessary -- including default -- to work down the credit excesses of the housing bubble. You can see this in the ratio of liquid assets to liabilities, which compares assets like bank deposits and stocks to liabilities like mortgages and auto loans. The ratio, which is largely determined by stock market performance, jumped from 1.99 in the fourth quarter of 2011 to 2.11 in the first quarter of this year, the largest quarterly increase since the end of 1999, and is at its highest reading since 2002.

Total Consumer Credit Owned and Securitized, Outstanding

It's likely to have fallen in the second quarter because of reductions in debt. In the first three months of the year, household debt fell $48 billion -- the fourth decline in five quarters and the 12th drop in 14 quarters. This came despite an increase in consumer credit, a sign that people are paying down or simply giving up on their mortgages but are relying on credit cards and student loans.

Even the drop in manufacturing activity isn't as bad as it seems. While the ISM manufacturing index fell to 49.7 in June from 53.5 in May (any reading under 50 indicates month-to-month contraction), that by itself is not a recessionary signal. Historically, according to Capital Economics, the measure needs to drop to at least 47 to be consistent with an outright decline in the economy, or recession. The ISM states the break-even point is a reading of just 42.6. We're far from that.

The larger services sector of the economy is hanging tough, with the ISM non-manufacturing index falling to 52.1 from 53.7. This makes sense, since manufacturers are more sensitive to what's happening in China and Europe, while service providers are keyed to the U.S. consumer.

And finally, the Conference Board's Leading Economic Index, which increased 0.3% in May, suggests GDP growth should maintain a pace of around 2% going forward. An increase in building permits (multifamily starts) and low borrowing costs are the reasons for the perceived strength.