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Reports of the Economy’s Demise Appear Premature

After the bizarre August events, investors, commentators, politicians and not a few economists became convinced the economy was headed directly into a double-dip recession.  Well, the path from growth to decline is not as clear as many thought.  Job growth is improving, manufacturing is expanding and consumers are actually buying big-ticket as well as lower-priced items.  No, the economy is not shifting into high gear, but it hardly looks like a recession is inevitable.

The case for a double-dip (hold the sprinkles) came from the failure to create any new jobs in August.  At least that was what the Bureau of Labor Statistics said the first time it crunched the numbers.  But by the time the September data were available, it turned out businesses were adding to their payrolls not only in August but in September as well.  The private sector hired a total of 180,000 new people over the two months — not a great pace, but hardly indicative of impending doom.

The details of the employment report also hold out hope that conditions may be firming.  Construction firms finally hired some people, possibly signaling that this critical but long-suffering sector may be getting back on its feet.  Retail, telecommunications, health care and professional services were also up.

In addition to the employment increase, wages and hours worked improved.  That points to decent income gains.  Since it is spending that shapes the economy, the holiday shopping season may turn out to be better than expected.  Indeed, we saw a solid rise in vehicle purchases and retail sales in September, so maybe the opening of the wallets has already begun.  Of course, with the unemployment rate remaining at a way-too-high 9.1%, a lot of people will be in no mood to shop ‘til they drop.

But what is really driving decisions on the part of both households and businesses is uncertainty.   While it would be nice if the politicians in Washington made nice, that is not likely to happen.  With the 2012 presidential primaries starting early, politics will trump economics, at least until the deficit reduction panel makes its proposals toward the end of the year.

European debt issues also continue to roil the markets.  A solution will be crafted, but when you need unanimity of 17 nations, the process is slow and ugly.  Until then, the volatility in the markets due to the fears of a European default crashing the financial system will continue, so keep those seat belts buckled!

But the fundamentals of the U.S. economy are not that bad.  With households starting to move back toward more normal levels of consumption, with manufacturing production showing solid gains and with the service sector continuing to expand, the recovery is clearly continuing.

For growth to really accelerate, though, we need home construction to improve and credit to become more available.  Unfortunately, that will not happen overnight.  Even the Fed’s recently-enacted “operation twist” will provide only modest support for the economy by keeping long-term rates low.  And there is no magic bullet in Washington that our politicians can fire.  What we need is patience.  The economy is slowly grinding its way toward recovery, and that process will continue at the current modest to moderate pace for quite some time.  Still, up is an awful lot better than down.

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Posted in Industry News.

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