The warm winter has given way to even more pleasant days. The summer is coming quickly and while the weather outside may be delightful, some disconcerting issues have arisen about the economy. After last year’s summer of discontent and economic malaise, recent weaker-than-hoped-for economic reports have raised the possibility that winter recovery was just a head fake. My belief, though, is that better days lie ahead.
The situation in the labor markets, which had been clearly improving, suddenly became oddly confusing. Unemployment claims, which had been falling, took a turn for the worse. That was a warning that the April employment report could be a downer, and it was. Only 115,000 new positions were added to the payrolls. Continued sharp government spending cutbacks, especially for education, curtailed somewhat better private sector hiring.
Meanwhile, the critical service producing sector remains stuck in the mud. Though retail and wholesale trade, professional services, health care, hotels and restaurants keep adding workers, they could be hiring a lot more. At least manufacturing remains a bright spot but the sector accounts for only 9% of all jobs, so it can only do so much. On the income front, wages have been growing modestly and that trend was not broken in April. You cannot get stronger spending if people don’t have the money to spend.
All that said, there is reason to believe that conditions did not deteriorate. The February and March job gains were revised upward with the March private sector number going from 121,000 to 166,000. Don’t be surprised if the April data also show bigger gains than initially reported. In addition, the unemployment rate eased again, falling to 8.1%, the lowest level since January 2009.
But it’s not just about jobs you say? That is correct and when it comes to the business activity data, the winter really created a mess. The numbers are supposed to be adjusted for normal seasonal variations. The key word is “normal.” It is really hard to categorize the weather we had this winter as normal. People could get out and do whatever they wanted and buying shovels, sweaters or salt was not at the top of their list. In other words, economic patterns changed.
To see how strange things were, consider housing. Construction starts accelerated in January but weakened in March. Did housing really stumble in early spring? No. Normally, March is a month where activity starts back up but since it never faded, the decline was a statistical hiccup. Indeed, April construction, housing sales and even prices increased sharply. Since housing has held back the recovery, the indications that real estate conditions are changing for the better really bodes well for future growth.
There was also good news on the manufacturing front. Manufacturing output surged in April and the Institute for Supply Management’s index rose as well. Add to that decent retail sales and you have a picture of fairly broad-based improvement.
But there are still major concerns. The services sector simply needs to do better. This is the largest portion of the economy and a little better is just not good enough. There are also growing concerns about Europe, where growth in many countries is spiraling downward. Our exports to the Eurozone are declining and the equity markets are spooked by the uncertainty of how Greece, Spain and other countries will work out their financial problems.
The government, though, may be the biggest restraint to growth we have. Looking at first quarter GDP growth, the government reduced activity by over one-half a percentage point. The 2.2% growth rate would have been 2.8% if there was simply no change in government activity. The impression is that governments at all levels are being profligate. That may be the case but for the last 18 months, not just states and local governments, but the federal government as well has been a negative when it comes to growth.
So when you add it all up, the economy has not slowed much at all. Indeed, the recent data are simple reminders that we should not obsess about the monthly numbers. Instead, look at the trends and the pattern still points to moderate growth ahead.