I wrote on June 11 that the financial services sector was under pressure, and the heat continues. One of the big memes floating around about the banking industry has been how nothing fundamental was really done, in the aftermath of the financial crisis, to rein in systemic risk. The Dodd-Frank Act was supposed to do so, but, the narrative went, it didn’t go far enough and had been gamed by the banks to remove the most onerous provisions.

Regardless of whether this was true—and there was enough truth there to make it plausible—the narrative has supported a continued push to rein in the biggest banks. Today, federal regulators took, to quote the Wall Street Journal, “their first big swing at addressing fears that Wall Street’s largest firms remain too risky five years after the financial crisis.”

I wrote on July 3 that the U.S. is the only continental power with voluntary economic integration. By that, I meant that the fiscal transfer mechanisms have been in place for a long time and are generally accepted. Few people know, for example, how much their state pays to the federal government versus how much it receives. It has come up in the past, of course, usually in stressed economic times, but it has never become a long-term political issue.

The data that has come out over the past couple of days has been somewhat contradictory, but, taken in context, I think it gives us a reasonably good idea of where we are economically.

The bad news is that second-quarter economic growth is probably going to be much weaker than people think, for several reasons. First, consumer spending has been growing more slowly than estimated; second, business investment has been declining faster than projected. Both of these factors have already contributed to the downward revision in first-quarter growth, and their effects have extended to the second quarter as well. The third major factor is that the U.S. trade deficit has come in much higher than expected, which will further knock economic growth for this quarter.

When we consider the details, though, things look better. First, much of the slowdown was due to weakness elsewhere in the world, which now seems to have been incorporated in U.S. activity. Second, the decline in the trade balance is arguably a good sign overall, as it suggests stronger domestic spending. Third, the slowdown in spending by both consumers and business largely took place in April, and spending seems to have picked up again in May and June.

The big picture here is that we had a second-quarter slowdown, like previous years, but we still grew. Moreover, we did so in the face of weakness in the rest of the world, as well as the turbulence in May and June, not to mention interest rate increases from the Fed’s intimations of exit. This actually says to me that growth is reasonably well positioned going forward.

Further, the most recent data is more encouraging. Employment grew more strongly than expected, according to the latest reports, as did personal income. Earlier, weaker reports had significant upward revisions. Importantly, state and local governments, and even the federal government, are starting to be positive rather than negative contributors. The rest of the world is also looking somewhat stronger.

Overall, the picture is a bit cloudy but generally encouraging from an economic perspective. In this sense, what we are seeing in the economic commentary is an expectation that the Fed will indeed start tapering (that is, reducing) its stimulus measures in September, driven by the improving economy as well as a growing fear that the risks of maintaining stimulus exceed those of decreasing it.

That may be, but I have my doubts. I’ve been writing for some time that, economically, we are in a sustainable recovery—and, from a strictly economic perspective, I agree that stimulus should be reduced. From a political perspective, not so much.

As I wrote a couple of weeks ago, from a federal budget standpoint, we are at Defcon 1 and have been since mid-May. We should hit the red line on the federal debt limit sometime around September—right around when the Fed will decide whether to start tapering.

It could be that Congress will, unlike past times, quickly come to an agreement to raise the debt ceiling, without any confrontation or drama. If so, and if done before the Fed’s meeting, tapering would probably make sense. I am not sure, were I Ben Bernanke, that I’d be willing to bet on that.

Another critical political event, the German elections, also happens in September. As we are seeing with Portugal right now, the European crisis is far from resolved, and when everyone returns from summer vacation, we often see more volatility in Europe.

Given all of the political balls in the air, here and abroad, I have serious doubts whether it makes sense to start the taper in September. December is more likely, assuming everything goes well in September, but even then, the Fed may be cautious. The markets seem to be realizing this as well. Rates spiked on Friday but today are drifting down again.

Overall, I am encouraged by the latest data, but the recent weakness combined with the pending political issues suggests that we’re not completely out of the woods yet, and that the Fed may well hesitate before declaring victory.

I will freely admit that I wrote this post ahead of time. When you read this on Friday, I plan to be on a beach, either flying a kite or dragging my son around on a boogie board.

As I prepare to head to Maine to celebrate the Fourth with my family, I’ve been reflecting on a number of my past themes—the place of the U.S. in the world, the structure of the republic, how grateful and lucky I am to live here, and how well positioned we are in the world.

The first thing I want to mention is an excellent New York Times blog post about the meaning of the Battle of Gettysburg, by Allen Guelzo. Briefly, Professor Guelzo makes a strong case that the Civil War, with Gettysburg as the turning point, helped refute the argument that democracies were unstable and could not survive. Given that democracy has become a de facto gold standard for government, the early elimination of the U.S. as an exemplar would have changed the way the world has evolved—for the worse.

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There are many driving factors behind the potential crisis in student loans, but one of the largest is the increase in the cost of college over the past couple of decades. It’s difficult to derive the actual statistics from the data, but several datasets I reviewed show that the college education inflation rate is between 150 percent and 200 percent of the base price inflation rate. Financial planning courses suggest planners use a similar ratio.

In a previous post, I talked about why service industries, such as medicine and education, are much more difficult to scale. Inputs—doctors and teachers—become less effective with scale, which means that costs go up with size. That’s why medical and educational expenses increase faster than overall prices.

Probably the most important industry in America, for many reasons, is health care. As a percentage of the economy, as a growth sector, and, of course, as a key to people’s health, this industry touches everyone in multiple ways. It is so central, in fact, that many would deny it’s an industry at all. Doctors refer to themselves, as they should, as professionals serving patients, not the economy.

But health care is an industry, and it does take money; as such, what happens here affects the country as a whole. Precisely because it’s been seen as something beyond economics, health care has been more or less exempt from the contractionary forces operating on the rest of the economy.

Not a lot of urgent economic news today, thank goodness. The recovery continues, with more good news and an increasing percentage of data points coming in above expectations. The Fed continues to emphasize that it has not and will not pull back in the immediate future, and stock markets are responding.

Over the past three months, we have seen quite a bit of volatility. What we’ve been talking about the past week or so has been downward volatility—the drop following the Fed meeting and Ben Bernanke’s press conference. This is what most people mean when they talk about market risk, and what upsets people.

Understandably so. I would argue, though, that the run we had from November up until late May—an almost uninterrupted ascent of the market indices—was also an example of volatility that should have worried us even more.