Four Good Signs for the Economy

Comment: While the United States economy remains fragile, it has started to recover from the plunge that began during the second half of 2008. So far the recovery has been weak, and many signs are signaling that any growth in the economy will be slow, unlike the rapid recoveries seen following recent recessions.

The good news is that positive signs are emerging. First, the official unemployment figure is beginning to stall at 10% and the four week average of initial unemployment claims is at its lowest level since August 2008. Claims trending downward and an increase in temporary and part time employment often signal the beginning of an economic recovery. Second, business lending is improving. This is significant because the expansion of credit is vital to the success of the economy. Third, residential construction has rebounded from its lows. While it would have been hard to imagine a further collapse in residential building, the fact that demand has picked up is an important sign that the economy has found footing. Finally, global demand has improved. The economies of many countries started to grow during the second half of 2009. In today’s integrated world countries are more connected than ever before and are dependent on the health of the global system.

Unfortunately, for every positive there is a corresponding negative. While companies have begun to slow down layoffs the concern is that full time hiring will not improve in a meaningful way for many years. Over the course of the recession productivity has increased significantly. During the second and third quarter of 2009 productivity jumped approximately 2% and 4% year over year, respectively. This indicates that firms are finding that they are able to produce more with less labor. The question remains how long can this surge in productivity last and when will companies face demand great enough to hire once again? Regarding employment the United States has continued to rely more on the service sector than the manufacturing sector. The fear is that if this trend continues and manufacturing become less than 10% of all jobs it may make it more difficult for those whose skill set is tailored for the manufacturing industry to find a job.

While business lending has improved, as the Fidelity article points out, for most small businesses the biggest problem is poor sales, not access to credit. Retail sales declined by 0.3% in December indicating that consumers have continued to tighten their belts. Consumer credit is also falling as individuals and families de-lever and begin to save more.

While it is true that residential construction has begun to improve, the impact that the consumer home buying credit has had on this metric should not be forgotten. Over the past three years home prices have come down which has made home ownership more affordable, but has left many homeowners underwater as they owe more principal than their house is currently worth. The Case-Shiller Price Index Composite-20 illustrates that home prices have begun to stabilize around the country, but the author of the Fidelity article voices her fear that a shadow inventory, made up of those waiting to sell until conditions improve and others who are still being foreclosed upon, will overwhelm the home market and cause further declines in home prices.

While the global economy has rebounded from its first year over year contraction since at least 1980, the promise for growth like that seen over the past decade is remote, at least among advanced economies. In order to stimulate the economy, many countries began loose monetary and fiscal policies. Central bank interest rates have approached zero in major developed nations to encourage the extension of credit, while fiscal stimulus measures were undertaken to encourage consumption and growth in the economy. While these actions may have stabilized economies around the world it also has come at the cost of large amounts of government borrowing. Organic growth will need to occur before countries can feel comfortable with the recovery.

The above mentioned items have led many to expect a muted recovery, one in which the United States economy expands but does not grow as quickly or as robustly as it has in previous recoveries. With a slow recovery to date, which has been fueled by government spending, the effects of continued deleveraging by individuals and weak consumption could mean that the unemployment rate may take years to get back to the long term average of approximately 6% and asset reflation may be subdued.