The U.S. economy is on an expansionary, albeit sluggish, path—not toward a double-dip recession, says BNY Mellon Chief Economist Richard B. Hoey. In the near term, however, hold onto your hats: The “most pronounced weakness in the U.S. economy” will become apparent in the second and third quarters of this year, he says.

Hoey attributes the near-term volatility to the end of the inventory swing from minus $161.8 billion in the second quarter of 2009 to positive $63.2 billion in the second quarter of 2010. Hoey also believes the stress the U.S. economy experienced in the spring was temporary, due to since-unfounded fears of a European financial crisis.

Nonetheless, he argues, the U.S. labor market has shown improvement of late, with private sector payroll employment rising 61,000, 107,000 and 67,000 in June, July and August. Wages are also growing just under 2%. However, Hoey warns, these improvements in the labor market are not strong enough to significantly reduce unemployment.

Hoey points to several critical U.S. industries that have seen so little growth he argues there is nowhere else to go but up. Housing prices and construction, for instance, may weaken now that the support from artificial tax credits is over, the chief economist says—but “the housing sector is finally at the bottom of an L-shaped pattern” and set to improve in 2011.

“The downtrend in both residential and non-residential construction is likely to burn out soon at extremely depressed levels, eliminating a source of incremental weakness in the economy,” Hoey says. “Most cyclical sectors of the economy continue to be at below-normal levels due to the recession, and, therefore, the potential for further weakness is limited.”

Hoey’s two most convincing arguments are, first, the strong balance sheets that U.S. corporations are sitting on, and their need to spend on capital modernization in order to compete. And, second, U.S. auto sales trending at about 11.5 million units a month, down dramatically from the 16.5 million they averaged before the crisis. “U.S. auto sales are dramatically below historic norms but have entered a gradual uptrend which is likely to persist—the level is depressed but the growth rate is positive.”

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