Thursday, December 23, 2010

Economic Trends Point To Continued Improvement

Positive momentum of economic growth in recent months looks promising. The trend appears to be improving in the areas of personal consumption and jobless claims, but uncertainty of the future is still holding back hiring. See the following post from The Capital Spectator.

The third and final estimate for third-quarter U.S. GDP that's scheduled for release tomorrow is expected to report a rise of 2.7%, economists predict, according to the consensus forecast via Briefing.com. If accurate, the gain represents a slight improvement over the previously reported 2.5% increase. That's still modest, but the trend at least looks friendly.

The case for thinking that the economy will continue growing in the months ahead rests partly on momentum, which has been positive recently, particularly in recent months. Should we expect more of the same? In search of an answer, or at least some perspective, a few pictures are worth several thousand words.

Indeed, the trend is clear if we survey rolling 12-month percentage changes in the economic indicators. For example, consider the chart below, which shows the annual pace for three key measures of economic activity: private sector employment, real retail sales, and total weekly hours logged by workers. In all three cases, there's been a sea change for the better in the trend. Retail sales turned higher initially, followed by improvement on the employment front.



The dramatic change for the better is good news, of course, although the magnitude of the revival in relative terms is somewhat misleading as a window into the future. The recession of 2007-2009 was unusually deep, which led to a recovery that was equally stark in relative terms. As the trend settles into something approximating normality, the true nature of the expansion is revealed. That inspires a closer analysis of the trend. For instance, the second chart below shows the monthly percentage change in private employment through November. By this measure, there's reason to wonder if the economy's capacity for creating jobs is stumbling.



As long as consumer spending holds up, it's reasonable to reserve judgment on the next phase in the labor market. Employment, after all, is a lagging indicator. One clue for expecting that job growth will accelerate comes from looking at the trend in real disposable personal income, a key factor for personal consumption expenditures. The American economy is heavily dependent on consumption. That may change in the yeas ahead, but for now it's still the 800-pound gorilla for macro analysis. Looking at the year-over-year change for both of these measures suggests the economic growth still has the upper hand, which implies that the revival in the labor market will continue.



There's also a glimmer of hope that initial jobless claims are finally starting to drop after treading water in the first half of the year. If the decline continues, the odds improve that the economic expansion will roll on.



Nonetheless, the year ahead will be a rocky ride, as suggested by last week's update on labor markets within states. State unemployment rates were generally unchanged in November, the Bureau of Labor Statistics advised. The national jobless rate inched upward by 0.2% in November to 9.8 percent, which works out to a stagnant trend from a year ago.

“There is a fundamental change under way in the hiring habits of companies, who are not very sure about the strength of final demand and the strength of the economy,” John Silvia, chief economist at Wells Fargo Securities, tells Bloomberg.

Changing the general level of uncertainty and caution about the future isn't going to be easy. The risk of recession has receded, but the odds for robust growth remain low in the near term. The economy, it seems, is struggling to break free of the new normal. It's going to be a long struggle.

Update: The third GDP update is scheduled for Wed, Dec. 22--not Tues., Dec 21 as originally reported. Sorry for the confusion.

This post has been republished from James Picerno's blog, The Capital Spectator.
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