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New Challenges Threaten to Slow Economic Recovery, Not Derail It

This post is part of a series by Joel Naroff, an economist who serves as an advisor to Susquehanna.

 

The recovery had been tooling along at a slow but steady pace. Consumers were spending their tax cuts, businesses were hiring and investing and it looked as if the economy was ready to shift gears from recovery into expansion. Then the world and its inter-connected economy were rocked by political instability in some oil-producing nations and the earthquake and tsunami in Japan. In addition to the devastating toll these disasters have taken on human life and local communities, there will be a global economic toll as well.

The economic stars were aligning. Job growth was improving as the private sector added a solid 222,000 new positions in February. The gains were widespread as manufacturing, services and even construction companies decided it was time to meet the growing demand with additional workers. The public sector, however, continued to slash their workforces, especially in education. With hiring ramping up, the unemployment rate is coming down, declining to 8.9%, the lowest since April 2009. Clearly, there are still way too many people out of work, but the nearly one percentage point decline in just three months is heartening.

There were other indications the economy was starting to pick up steam. Retail sales this year have been impressive. People are buying big-ticket items such as vehicles, appliances and electronics as well as clothing and sporting goods. Consumer confidence has improved, though recently the rise in gasoline prices has begun to rain on the economic parade.

Indeed, the path from recovery to strong growth now has to go through high energy costs.  We are spending billions more money on gasoline, as prices have jumped fifty cents this year alone. It now looks like we could pump all the extra money from the tax cuts into our gas tanks. It is impossible to know how the chaos in parts of North Africa and the Middle East will play out, but one side effect could be an extended period of elevated gasoline prices.

But energy is not the only concern as food prices are surging as well. Wholesale food costs have soared at the fastest pace in decades. The higher producer costs have not been passed through to consumers as rapidly as in the past but more price hikes are coming.

In Japan, the impact of the earthquake, tsunami and resulting damage to nuclear power stations has been devastating. Although we still don’t know what the economic costs will be, they too will be huge. Japan is a major trading partner of the United States and there is little doubt their economy is in for a long period of rough times.

The economic recovery is still on track, but now we face additional hurdles. Unlike three years ago when we were already in recession and $4.00-a-gallon gasoline crushed spending, this time the economy is growing. That should help us get through this difficult time. When conditions settle down, look for stronger growth to appear. Unfortunately, getting there may be more of a challenge than originally expected.

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Posted in Industry News.

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