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High Oil Prices or Not, the Economy Is Proceeding Full Speed Ahead!

In 2008 and in 2011, high oil prices led to consumers losing hope and cutting back spending.  While gasoline above $4.00 by itself did not crater the economy, it did play a major role in its slowdown.  At least for now, the recovery remains on track and consumers seem to be dealing with the raid on their wallets fairly well.  Once we get the expected pull back in prices, business activity should accelerate.

The key to any forecast is the labor market.  This has been the topic of discussion around the dinner tables across the nation and it seems that every politician has their own view on what is wrong and how to fix it.  Interestingly, it may actually be healing itself.

The February jobs release was everything you wanted in an employment report and more.  While the hiring of 227,000 new workers was nothing spectacular, the details of the report were amazingly good.  A wide variety of businesses padded their payrolls.  The manufacturing sector has become a lean, mean jobs machine led by the once again formidable vehicle sector.

We knew from improving vehicle sales and the strong Institute for Supply Managers reports that manufacturing would be a leader in the “hiring new arms race.”  But the rise in temporary workers was also good news.  Now I know the first reaction is to say that it is better to have a permanent job than a temporary position, but the times they have been changing.  Firms are very dependent on employment agencies for all types of employees and when we see those positions being filled at a growing pace, it reflects growing corporate confidence.

But the key number was the unemployment rate, which remained at 8.3%.  Huh?  An unemployment rate that didn’t go down is good?  Well, yes.  The reason is that the labor force is growing robustly.  When frustrated workers start looking again, they are counted as part of the work force.  Since it always takes a long time to find a job, even in good times, they start out as unemployed.  Normally that increases the unemployment rate, which has yet to happen.  Ultimately, we could experience periodic increases in the unemployment rate, but that will only be a normal occurrence.

While it may be jobs, jobs, jobs for politicians, economists are concerned about the full range of economic data.   The good news is that we are seeing almost all the numbers come in solidly.  Manufacturing output is soaring as both domestic and foreign demand expands.  Consumers are spending money on things other than motor vehicles and gasoline.  They are going out to eat again, buying appliances and electronics and fixing up their homes.  That too is a sign of growing optimism and indeed, the consumer confidence numbers are on the rise.  Even the housing market is firming as builders are becoming much more hopeful.

Despite improving conditions, some hurdles remain.  The Greek situation may be stable for now but other countries could follow Greece into managed bankruptcies.  High energy prices are sapping household spending power.  Supply and demand are not out of whack but concerns about Iran are causing markets to price in a possible dislocation of supplies. Last year, gasoline prices peaked in the spring and fell over the summer and there is a chance that pattern will be repeated this year. Finally, the trade balance is widening again but that is the downside of good growth.

While there are restraints that are likely to slow things down for a while, the economic momentum carried into this year is not only being maintained but it is expanding.  And if the fears of a Middle East crisis fade and energy prices decline, we could easily see the economy accelerate during the second half of the year.

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Posted in Industry News.

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