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The Economy is Starting to Shift Gears, But Issues Remain

In my outlook for 2012, I ended by saying that “2012 should be quite a bit better than 2011.” Well, we are already seeing signs that the improvement is already under way. Job growth has picked up sharply, the unemployment rate is coming down, confidence is improving and manufacturers are picking up the pace. The momentum we saw at the end of 2011 has carried into the early part of this year.

As usual, all eyes were on the monthly employment numbers and the January report did not disappoint. Private sector firms hired over 250,000 new workers and almost every industry was up. Manufacturing, construction, wholesale trade, health care, transportation, professional services, temporary help and restaurants all joined in on the hiring binge. Since hitting bottom in February 2010, businesses have brought back almost 3.7 million workers. The jobless recovery is no longer jobless, unless you work in the public sector. Local education is still being slashed as a consequence of state and local budget cutbacks.

Adding to the view that this was a really strong report were the measures of income. With hours worked and wages rising, income looks like it is finally beginning to grow more strongly. That will add to spending power, which is badly needed.

But the eye-opener was on unemployment front. The unemployment rate fell to the lowest level in three years. In October 2011, the rate was 8.9%, and now it is 8.3%. It is rare that we see consistent declines even when the economy is booming and right now that is not the case. While the steady decline in unemployment claims points to further reductions in the rate, don’t be surprised if going forward, there is some backsliding. More jobs and lower rates convince discouraged workers to re-enter the workforce, often causing unemployment rates to rise for a while. Even if that occurs, the outlook remains for the unemployment rate to be below 8% by late fall.

The strong January employment report was not an aberration as a whole slew of other data support the notion that the economy is picking up steam. The Institute for Supply Management’s reading on both manufacturing and services were both up and the purchasing managers indicated that hiring was accelerating. Manufacturing production rebounded sharply after a lull and households have continued to hit the dealerships harder and harder. Okay, motor vehicle sales of just over 14 million units annualized are still well below where they should be, but that is still a nearly 12% rise in a year.

Yet despite all the good economic news, the Federal Reserve remains quite reserved about the economy. The FOMC released its long term forecasts and the members are concerned that growth will not improve. Indeed, the Committee noted that it expected to keep rates extraordinarily low until the end of 2014. Given that view, regardless of how fast the economy improves, interest rates should remain quite low at least for another year.

The economy is coming back. Just about every nook and cranny is beginning to show signs of life. But I have said this before and I will keep saying this: It will be very difficult for growth to become really strong as long as the housing market is battered by the avalanche of distressed homes and some financial institutions are cautious in their lending practices. Nevertheless, even if there are some setbacks ahead, the foundation has been created for a much better period of economic growth.

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Posted in Industry News.

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