The Conference Board reported this week that the Leading Economic Index (LEI) for the U.S. increased in November for the fifth straight month, and for the 19th month out of the last 20 months going back to April 2009 as the recession was coming to an end and the LEI turned up (see chart by Mark Perry below).
The latest from Robert Barr in this week’s SAF Trend Tracker:
The nature of this recession – caused by a financial panic – means that the recovery is not playing by the customary script this time. Housing, for example, usually leads the economy out of a recession, as low interest rates spur new residential construction and home sales. But the number of troubled properties on the market remains high, even though much of the excess supply is concentrated in just a few markets. In terms of being a source of strong economic growth, housing will likely sit on the sidelines for a few more years.
The good news is that the economy is growing, albeit at a slower pace than we’d hope – and too slow a rate to bring down the unemployment rate, for now. In fact, the unemployment rate climbed in November to 9.8%, up from 9.6% in each of the three previous months. But the labor markets are always a lagging indicator of economic recovery.
Other important figures reflecting conditions more “upstream” in generating economic growth tell a different and much more positive story. For instance, corporate profits are up 28% over year-ago levels (fueling the stock market improvement). And business investment in software and equipment is booming, up 19% in the past year. That’s the strongest four quarters of growth in that segment in 26 years – even surpassing the build-up to Y2K. These developments do follow the usual story for economic recovery, as business owners, prodded by lower interest rates, add to business investment. As entrepreneurial activity and investment grow, corporate America lays the groundwork for stronger economic growth in the coming quarters.
Mix the strong activity here with the relatively strong kick-off to the holiday shopping season, and you get a strong sense that the recovery is in fact taking root – and that fears of a “double-dip” recession are overblown. And not only are the early reports from the nation’s large retailers positive, they also indicate that consumers are spending money on themselves, too – in contrast to the last few holiday seasons, when spending was more constrained.
Finally, the tax compromise that was coming together in early December could, if enacted according to the announced framework, provide some important fuel to stronger economic growth. The extension for two years of the current set of income tax rates – rather than the increase currently slated to go into effect on New Year’s Day – not only helps the entrepreneurial segment, but it ends some uncertainty, at least for now, about tax rates. The one-year cut in the Social Security payroll tax also generates a bit more cash for households, but, more importantly for economic growth, the investment expense provisions and the lower capital gains tax, currently at 15 percent, should prove to be an important business incentive.
Robert Barr is an economist based in Virginia.
Sources: Bureau of Labor Statistics (Dec 3, 2010); Bureau of Economic Analysis (Nov 23, 2010); Moody’s Analytics.
It certainly has been a week of strong economic news. In true Letterman style, consider the following top 10:
- Economic activity in the manufacturing sector expanded in October for the 15th consecutive month, and the overall economy grew for the 18th consecutive month, say the nation’s supply executives in the latest Manufacturing ISM Report On Business.
- The BEA reported that real personal consumption expenditures reached $9.349 billion in September, the highest level of U.S. consumer spending since the recession started in December 2007, 33 months ago. On a year-over-year basis, September’s 2.3% increase in consumer spending was the largest percentage increase in three years, since September of 2007.
- The National Restaurant Association’s Restaurant Performance Index (RPI) – a monthly composite index that tracks the health of and outlook for the U.S. restaurant industry – stood at 100.3 in September, up a solid 0.8 percent from its August level (see chart above). In addition, the RPI rose above 100 for the first time in five months, which signifies expansion in the index of key industry indicators.
- Based on average real GDP growth (subject to revisions of third quarter GDP) for the five quarters following recession, this expansion is stronger than the 2002 expansion by almost a full percentage point (2.81% vs. 1.87%), and just slightly below the 1991-1992 period (2.96%).
- The BEA reported that real GDP grew at 2.0% in the third quarter, boosted by a 2.6% rise in inflation-adjusted consumer spending, the highest quarterly increase since the 4.1% growth in the fourth quarter of 2006, 15 quarters ago. This healthy growth in consumer spending from July through September is consistent with: a) the many states that have been reporting increases in tax revenues in the third quarter from sales, individual income and corporate income taxes, and b) the stronger-than-expected retail sales report for September (7.2% annual growth).
- Rail traffic continued on an upward trend for the week that ended last Saturday, with both carloads and intermodal traffic registering solid gains versus the same week last year of 9.6% and 13.6% respectively.
- The BEA reported today that real GDP grew at 2.0% in the third quarter, boosted by a 2.6% rise in inflation-adjusted consumer spending, the highest quarterly increase since the 4.1% growth in the fourth quarter of 2006, 15 quarters ago. This healthy growth in consumer spending from July through September is consistent with: a) the many states that have been reporting increases in tax revenues in the third quarter from sales, individual income and corporate income taxes, and b) the stronger-than-expected retail sales report for September (7.2% annual growth).
- Except for the holiday-related July 10 low, last week’s 434,000 seasonally-adjusted weekly claims for unemployment insurance was the lowest since the week of August 23, 2008, more than two years ago.
- New orders for durable manufactured goods in September reached the highest level ($199.1 billion) since September 2008, two years ago (see top chart above). The 12.2% increase in durable goods orders in September compared to the same month last year was the ninth consecutive double-digit increase starting in January of this year.
- The International Air Transport Association (IATA) released international traffic results for September today, reported that international passenger traffic had a 10.5% year-on-year increase which is significantly stronger than the 6.5% rise recorded for August.
Hmmm. Good week considering we are still not performing at our potential. That’s going to take a bit longer I’m afraid.
The Business Cycle Dating Committee of the National Bureau of Economic Research met yesterday by conference call. At its meeting, the committee determined that a trough in business activity occurred in the U.S. economy in June 2009. The trough marks the end of the recession that began in December 2007 and the beginning of an expansion. The recession lasted 18 months, which makes it the longest of any recession since World War II. Previously the longest postwar recessions were those of 1973-75 and 1981-82, both of which lasted 16 months.
In determining that a trough occurred in June 2009, the committee did not conclude that economic conditions since that month have been favorable or that the economy has returned to operating at normal capacity. Rather, the committee determined only that the recession ended and a recovery began in that month. A recession is a period of falling economic activity spread across the economy, lasting more than a few months, normally visible in real GDP, real income, employment, industrial production, and wholesale-retail sales. The trough marks the end of the declining phase and the start of the rising phase of the business cycle. Economic activity is typically below normal in the early stages of an expansion, and it sometimes remains so well into the expansion.
The committee decided that any future downturn of the economy would be a new recession and not a continuation of the recession that began in December 2007
How can Congress reduce future deficits while stimulating today’s economy? University of Delaware economist Laurence Seidman argues that legislators should enact a budget that maintains balance under normal unemployment levels, and a fiscal stimulus package with a clause that phases out the package as the economy returns to full employment. Want to read more? Click here.
In its annual Labor Day outlook, global outplacement consultancy Challenger, Gray & Christmas reports that the U.S. job market is well on the road to recovery and is actually rebounding sooner and faster compared to the jobless recoveries that followed the previous two recessions (1990-1991 and 2001). Here are some highlights:
1. At this point in the previous two recoveries – following the 1990-1991 and 2001 recessions – the job market was actually getting worse. Many people are so caught up looking at the weekly and monthly numbers, that they fail to look at the bigger trends, which indicate just how much the job market has improved over the last 12 months. The statistics indicate that the job market has made great strides over the last 12 months and appears to be rebounding sooner compared to the previous two recessions.
2. Monthly job cuts have numbered fewer than 100,000 for 14 consecutive months, a streak that has not been achieved since 1999-2000. The current 12-month moving average, which stands at 52,778 as of the end of July, is already well below the lowest annual average achieved during the last period of economic expansion, when the moving average bottomed out around 64,000.
3. Job losses due to the recession turned to gains as of January 2010, with payrolls experiencing five consecutive months of net growth that saw more than one million new jobs added to the economy. The gains slowed in June and July as the government shed tens of thousands of temporary Census workers, resulting in overall total non-farm job losses of 352,000 over the two-month period. Despite those losses, payrolls have still seen net growth totaling 654,000 jobs so far this year, due in large part to steady job gains in the private sector. The private sector has had seven consecutive months of job gains, adding a net total of 630,000 new jobs to the economy since January 1. While the payroll gains remain weak, they are occurring much sooner when compared to the 2001 recession, when it took 21 months before the economy began to add jobs on a consistent basis.
4. While the unemployment rate remains historically high and the decline is not occurring fast enough for most, it definitely appears to be heading in the right direction. If the economy were following the same pattern as the early 1990s recession or the 2001 recession, we would be facing another three to six months of rising unemployment.
5. When you look at any of the employment statistics on a month-to-month or week-to-week basis, there are going to be ups and downs; particularly at this stage of the recovery. However, when you look at the overall trend since June 2009, everything is headed in a positive direction.
6. Hiring will accelerate in the coming months, but not before employers maximize the productivity of their existing workers by adding new technology and increasing hours. In the meantime, the job market will remain fiercely competitive as the recently unemployed square off against the long-term unemployed as well as with job seekers re-entering the labor pool after abandoning it out of frustration. Job seekers should view Labor Day as the beginning of the workplace New Year and make a resolution to abandon all passive job-search strategies for ones that are far more aggressive.
From today’s Wall Street Journal article “The Case for Optimism” by Ross Devol, executive director of economic research at the Milken Institute:
Gloom and doom is the hallmark of the current economic debate, as the most recent congressional testimony from Federal Reserve Chairman Ben Bernanke demonstrates. Despite Mr. Bernanke’s generally upbeat message on the Fed’s official forecast, which calls for moderate economic growth of somewhere between 3.0% to 3.5% this year, the market and the media fixated on his acknowledgment that the outlook was “unusually uncertain.” Those words have only reverberated in the past few weeks, bolstering economic pessimists.
There’s a point at which pessimism becomes a self-fulfilling prophesy, scaring businesses away from investing or hiring. The dark tone of today’s discourse is at risk of doing just that.
The Milken Institute’s new study, “From Recession to Recovery: Analyzing America’s Return to Growth” is based on extensive and dispassionate econometric analysis. It concludes that the U.S. economy remains more flexible and resilient—and has more underlying momentum—than is generally acknowledged. In fact, our projections show cause for measured optimism: A return to modest but sustainable growth is close at hand.
America’s businesses are capable of navigating around policy uncertainty and the twists and turns of a volatile global economy. While slow private-sector job growth is to be expected in the early stages of a recovery, the U.S. should add 1.5 million jobs in 2010, 3.1 million in 2011, and 2.6 million in 2012. That will translate into real GDP growth of 3.3% in 2010, 3.7% in 2011, and 3.8% in 2012.
In this pessimistic climate, this forecast will likely be considered contrarian. So why is our economic outlook more sanguine than the current consensus? For one, robust (albeit moderating) economic growth in developing countries, particularly in Asia, will provide support for U.S. exports. Look no further than Caterpillar, which reported a doubling of its earnings in the second quarter of 2010 and whose product line is sold out for the rest of the year.
Improved business confidence is already spurring strong investment in equipment and software. Record-low U.S. long-term interest rates are supporting the recovery. And the benign inflationary environment allows the Fed to keep short-term interest rates near zero until late this year, or even into 2011 if it desires.
Historical context offers further reason to expect a rebound. The peak-to-trough decline in real GDP during this recession was 4.1%, making it the most severe downturn since World War II. But throughout the postwar period, the rate of economic recovery from past recessions has been proportional to the depth of the decline experienced. While this relationship has been somewhat variable, it is well-established. Our projections for GDP growth are above consensus but are substantially below a normal rate of recovery after a recession of this severity.
The naysayers are right that there’s a “new normal” economy, but it’s not that the potential long-term growth rate of the U.S. is substantially diminished, as they say. It’s that this time, the fulfillment of pent-up demand will be subdued because consumers were living so far above their means during the bubble years. Nevertheless, consumer durables and business investment in equipment will see some previously postponed purchases finally happen—if not this year, certainly by 2011 and 2012.
What needs to happen on the policy front in order to build momentum?
In the first place, small businesses need access to more bank credit to create jobs. Banks feel conflicted by calls from the Obama administration to increase lending while regulators are instructing them to add to their reserves. Regulators need to be reminded that some risk is necessary in a market economy.
The White House also should press Congress to pass legislation modernizing Cold War–era restrictions on exports of technology products and services that are already commercially available from our allies. This would boost U.S. exports and reduce the deficit. And if the White House is serious about doubling exports by 2015, it needs to push trade deals with South Korea, Colombia and Costa Rica through Congress.
For its part, Congress must move immediately to restore the lapsed R&D tax credit. Even better, it should expand the credit and make it permanent.
Congress also should pass legislation to temporarily extend the Bush tax cuts that are set to expire at the end of this year. It’s important not to remove any economic stimulus as long as the sustainability of the recovery is in question.
Another must-do: by 2012, Congress needs a credible long-term plan in place to reduce the deficit. If it doesn’t, international financial markets might force our hand by demanding a higher rate of return on U.S. Treasurys.
Washington has to focus like a laser on helping businesses create jobs, while the rest of us should avoid talking ourselves out of a recovery by dwelling on the doom and gloom. The U.S. economy has already adapted to serious imbalances in record time: There’s ample reason to believe in its dynamism in the months and years ahead.
Mr. DeVol is executive director of economic research at the Milken Institute, a nonprofit economic think tank based in Santa Monica, CA.
See related excellent post today from Scott Grannis: “20 Bullish Charts.”
The GDP report from the BEA raised a lot of concerns about the economic recovery, based on headlines and reports like this:
Mark Perry comments: But how does GDP growth in this recovery (assuming the recovery started in third quarter of 2009) over the last four quarters (1.6%, 5%, 3.7% and 2.4%) compare to output growth in the four quarters following the last two recessions in 1990-1991 and 2001? Pretty good actually, see the graph above showing real GDP growth in the one-year periods (four quarters) following the last three recessions.
Sure, real GDP growth has slowed from 5% to 3.7% to 2.4% over the last three quarters, but following the 2001 recession real GDP slowed even more, from 3.5% to 2.1% to 2% to 0.1%. And looking at the average growth over the four quarters following the last three recessions, the average 3.18% real GDP growth over the last year was higher than the 1.93% following the 2001 recession and higher than the 2.63% following the 1990-1991 recession. Keep in mind that the economic recovery that started in 1991 was the longest (120 months) and strongest economic expansion in the history of the U.S.
So what about a headline like “U.S. economic expansion stronger now than at the beginning of the last two recoveries?”
It could’ve shaped up to be a good week. After all, the Senate pushed through a vote on bank reform, bellwether earnings weren’t all that bad, BP finally seems to have halted the spewing oil in the Gulf, the Northeast got a small reprieve from the heat wave — and last but not least — Apple announced plans to rectify “Antennagate.” Nevertheless, U.S. stocks ended the week on a sour note, as the Dow Jones Industrial Average plunged more than 250 points Friday.
Bank reform moves ahead. This week, the Senate approved the most historic shakeup of the regulation of U.S. banks since the Great Depression. The legislation would place new fees and restrictions on the nation’s biggest banks, impose new restrictions on the Federal Reserve and craft a major new consumer-protection division for mortgage and credit-card products. Read more about the bank-reform legislation .
Just-in-case stimulus. Federal Reserve officials agreed it would be a good idea to study what to do if the economy were to worsen severely, according to a summary of June’s closed-door meeting released this week. Officials said the outlook for the recovery had softened between April and June, but changes to their forecast were “relatively modest” and “not warranting policy accommodation beyond that already in place.” Read more about the Fed minutes .
BP cap seems to be holding. BP shares (BP) slipped Friday as euphoria over the company’s apparent success in stopping the flow of crude from its ruptured well gave way to the realities surrounding the worst oil spill in U.S. history. In its latest update, BP said the well cap continues to hold. But the ruptured well isn’t dead yet, prompting a cautious tone from President Obama in his remarks on the spill. Read more about BP’s efforts to contain the leak .
Also, the latest from Bill Conerly.
As economists look for clues on the direction of consumer spending, they may want to look into how much Americans are willing to spend on their coffee.
Consumers have been more willing to spend since the lows of the recession, but recent declines in retail sales and confidence have sparked worries over whether spending can continue to grow in the second half of the year.
Enter the coffee indicator. A “tell-tale sign of how consumers feel about employment, income and the future is where they buy their coffee and whether they step up for the more expensive concoction,” wrote Majestic Research economist Steve Blitz in a recent research note.
Majestic Research tracks anonymous credit-card data, and can see how much consumers spend by category and store. Blitz broke out the average dollar transactions at Starbucks and Dunkin’ Donuts. The data show that during the worst of the recession consumers spent less at the two coffee outlets, but as the employment picture started to improve people were willing to spend more per transaction.
The trend reversed at the beginning of April when transaction size turned down. To be sure, much of that change is likely seasonal. Transaction size at Starbucks, especially, takes a big spike around the holidays as shoppers buy coffee baskets and mugs for those caffeine addicts on their lists. In the last two years, it has bounced back a bit through the late winter, turning down in April and then moving back up in the late summer/early fall.
So far, this year’s transactions at Starbucks and Dunkin’ Donuts is following the pattern. If that bounce back materializes in the late summer, it could indicate that consumers are still willing to open their wallets. But if the average transaction size levels off or continues to decline, it could indicate a more thrifty consumer will dominate the second half of this year.
Source: Phil Izzo, WSJ Blog, Real Time Economics