November 12, 2010 / 2:59 PM / 9 years ago

Analysis: Economy gets reprieve as consumers hang tough

WASHINGTON (Reuters) - The “new normal” for the economy is beginning to look, well, a little more normal.

A customer shops in the expanded baby department at a remodelled Sam's Club in Rogers, Arkansas June 3, 2010. REUTERS/Sarah Conard

While it is difficult to get euphoric about a recovery that has yet to curb unemployment, pockets of relative strength have at the very least pushed back fears of a double-dip recession, making economists more sanguine about the outlook.

Consumer spending, that ever-crucial component of any U.S. expansion, has been particularly robust compared to depressed expectations, even if that strength has been built in part on a potentially dangerous reliance on credit.

Orders for long-lasting manufactured goods have also marched steadily higher, and the latest findings from the Institute for Supply Management suggest both manufacturing and services companies stepped up activity in October.

Coupled with signs of strength presented by last week’s employment data, these shifts have led some economists to become more optimistic about the recovery’s durability.

“We are becoming increasingly convinced that 2011 will be the year in which the economic expansion finally puts down deeper roots and blossoms into a full-blown, job-creating recovery,” said long-time bear Ian Shepherdson, chief economist at High Frequency Economics in Valhalla, New York.

The economy generated 151,000 jobs in October and the prior two month’s numbers were revised sharply higher, leaving average monthly job creation at around 87,000 so far this year.

That’s paltry compared to past recoveries, and not sufficient to lower the U.S. unemployment rate of 9.6 percent. But the trend is moving in the right direction and may be helped by more monetary stimulus from the Federal Reserve.

“Clearly the job market is showing signs of improvement,” said David Resler, chief economist at Nomura in New York. “Prospects are better than they have been for a while that we can sustain growth above 2 percent next year.”

Fresh figures on the labor market on Wednesday told an interesting story.

A four-week average of the number of Americans who remained on the jobless benefit rolls after claiming a first week of unemployment aid fell to 4.3 million. That’s down from a peak of above 6.5 million in the summer of 2009 but only the lowest level since November 2008 in the midst of the financial crisis.

Further, that figure does not include the 3.8 million unemployed workers receiving benefits under an emergency program put in place by the U.S. Congress.


No one is talking about the sort of out-sized expansion that might be accompanied by sudden sharp gains in employment.

Rather, things are looking good on an expectations-adjusted basis: forecasts had gotten so depressed that the absence of further deterioration has looked rather positive.

“The downside risks to the economic outlook have declined significantly” was how Jan Hatzius, Goldman Sachs’ chief economist, put it.

The data have been pretty consistent on this count.

Most prominently, the closely watched ISM manufacturing index jumped to 56.9 in October from 54.4 in September. That was the highest level since May, just before troubles surrounding European debt became a drag on U.S. economic activity.

The improving U.S. trend suggests the timing of the Federal Reserve’s renewed effort to provide monetary stimulus to the economy might be fortuitous.

If the boost from lower borrowing costs hits the system just as firms are becoming more confident about the future, then perhaps those cost advantages will give managers an incentive to hire more workers than they otherwise would have.


It’s worth noting, of course, that the same European issues that triggered stateside summer doldrums are flaring up again, with Ireland rather than Greece in the hot-seat this time.

And then there is the housing albatross, which continues to hang around with no clear solution. While ultra-low rates are also meant to address this problem, forecasters expect home sales, still near post-crisis lows following a five-year slump, to remain near rock bottom for the foreseeable future.

Some believe the latest controversy over fraudulent foreclosure practices by the big banks could deepen the rout.

With that source of confidence — and income — gone, it is hard to envision a surge in spending and, by proxy, hiring.

Reporting by Pedro Nicolaci da Costa; Editing by Kenneth Barry

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