Sincerely,

Revisions to data for previous years also supported the notion of an accelerating recovery. Growth in 2012 was revised upward, though most of this came in the early part of last year. The second half of last year was weaker than had been initially reported, which implies that the first half of 2013 was better than the end of 2012.

Overall, although tax increases and spending cuts have slowed the economy, their impact seems to have been largely absorbed. The most recent employment numbers show continued growth, with positive job creation in all sectors but two. Total job creation was 668,000 in the second quarter, the most in three quarters. Worker incomes have also been growing faster than spending, suggesting that consumers may be able to continue their purchasing in the future.

Europe is looking better, but China looks weak

News from Europe was surprisingly upbeat. Although most European economies are still in recession, the mood appears to be shifting, as the situation seems to be stabilizing. Spain, for example, experienced a 0.1-percent drop in GDP in the second quarter, but this was a much smaller decline than in past quarters. Consumer confidence for the eurozone as a whole increased to the highest levels since April 2012, and confidence improved in most of the bloc's biggest economies, with the notable exception of the Netherlands. European Union-wide unemployment also improved modestly. None of this means that the outstanding problems have been solved, but the perception both in Europe and outside is that progress has been made.

China, on the other hand, has shown signs of slowing growth. After declining sharply in June, the Shanghai Stock Exchange Composite Index stabilized in July, but a weak manufacturing sector report caused the month to end on a sour note. Speculation has risen that the Chinese government may unleash more stimulus to boost growth, but it has refused to do so.
 
The Chinese government's decision to implement "Likonomics"-named after Li Keqiang, its premier-has not been popular among investors. These policies shun fiscal and monetary stimulus in favor of market reforms and deleveraging. In the long run, this move may represent a healthy transition, but shorter term it has caused market skittishness and slowed down economic growth. The combination of this policy shift and emerging local government finance problems, as highlighted in an International Monetary Fund report released at the end of July, suggests that troubles in China's equity markets may not be over.

Overall, an encouraging month

Evidence of increased economic growth has supported the strong performance in U.S. equity markets, with the potential for more ahead. Home values have been appreciating, despite increases in mortgage rates, and employment has continued to grow. Overall, the signs for the U.S. economy have been increasingly positive, as consumers have shaken off tax increases and the economy has adjusted to sequestration. Financial markets have been rallying, and interest rates, although higher, have been trading in a range and have not spiked to unreasonable levels.

Risks remain, in the form of political tension in Washington, DC and economic worries in Europe and China, but the U.S. still appears to be on the right track. The appropriate stance is cautious optimism, with a focus on the long term, as we wait to see whether the economy can transform its current slow but steady growth into something more robust.
Authored by Brad McMillan, vice president, chief investment officer, and Sean Fullerton, investment research analyst, at Commonwealth Financial Network.