Economy Warming with the Weather

Though the risk of a spike in energy prices looms, there’s mounting evidence  that this time, economic recovery is for real.

By John Maggs, Senior Economics Editor, The Kiplinger Letter

March 14, 2012

The economy has been heating up as much as the weather lately, but is it  only another false spring?

We don’t think so. Unlike 2010 and 2011, when early economic gains  withered on the vine, this year’s green shoots will bear fruit.

We’ll forgive you if you harbor some doubts. In 2010, after the worst and  longest recession since the 1930s, the economy grew at nearly a 4% rate through  June, and it looked as if a self-sustaining recovery had begun. But growth slowed sharply in the second half of the year, and  businesses shelved expansion plans. Similarly, in the spring of 2011, strong job  numbers made it seem as if the economy was back on track. In February, March and  April, employers added more than 200,000 jobs in each month, the first time that  had happened since 2006. Then employment gains plunged, and the economic growth  hit the brakes. U.S. gross domestic product ended up an anemic 1.7% for the  year.

This year, there’s more evidence of sustained recovery.

Consumers are starting to spend more. Cars and trucks are flying off  dealer lots, at the fastest pace since before the recession. February’s sales,  at an annualized rate of 15 million autos, will ease off in the coming months,  but sales this year may be close to 14 million, up from less than 11 million in  2009 and 13 million last year.

Retail sales are also strong. After a solid holiday season, retailers report  that sales are still growing, up 1.1% in February, normally a time when  consumers are hanging around the house waiting for the thaw. Warm weather helped  get them out to stores, and they did more than window shop. Overall retail sales  in February were 6.3% higher than a year earlier. Sales were up even more at  chain stores — 6.7%.

Unseasonable weather may not continue, but surging consumer confidence  indicates that the acceleration in spending will. The Conference Board’s  confidence index is up 30 points since October, to a reading of 70.1. That’s the  largest increase over a four-month span in more than 30 years. Consumers are  also signaling their confidence by borrowing more. Revolving debt — student and  auto loans, credit cards, etc. — is rising.

Meanwhile, the benefits to employers of cost cutting are fading. Productivity  — the output per worker — surged in the Great Recession and its immediate  aftermath, as employers slashed payrolls to stay competitive. In 2010,  productivity increased by 4%, above the long-run average of about 2% a year. But  growth stopped cold in 2011, actually falling for part of the year and ending  the year up a mere 0.4%.

Normally, low productivity growth is bad news because it holds down wages.  But in an economy with 8 million people actively looking for work, it’s good  news. We expect productivity gains to continue to languish in 2012, forcing  businesses that want to expand to hire workers. That, in turn, should spur  economic growth.

It’s also encouraging that job growth is becoming more consistent. Based on  the lower level of new claims for unemployment insurance this month, it is  likely that March will be another month of job gains north of 200,000. One of  the most discouraging things about the recovery since the Great Recession has  been the stop-and-start nature of economic growth and job creation. Though GDP  gains in the first half of 2012 won’t be spectacular — an annual rate of only  about 2% — more-consistent net job creation will reinforce consumer  confidence.

There are even signs of improvement in housing, still the biggest drag  on the economy. The inventory of unsold homes is dropping — at last count, to  the equivalent of about six months of sales at the current pace of closings. The  combination of mild weather, low mortgage interest rates and the prospect of  those rates turning around once the economy picks up some steam is luring more  traffic into open houses. At the same time, real estate brokers say sellers have  gotten more realistic about sales prices, finally accepting that the bubble  prices of a few years back are gone. Unfortunately, with millions of  foreclosures still in the pipeline, the modest improvement we expect in housing  prices by the end of the year won’t do much to nurture growth.

Finally, some clouds on the horizon look less threatening. Europe’s  debt crisis will calm down, now that holders of Greek bonds have agreed to write  off most of their investments. A repeat of last year’s fiscal brinkmanship in  Washington isn’t likely. The posturing angered voters, and members of Congress  won’t want to play chicken again before facing voters in November.

One major thundercloud remains: The prospect of a sharp spike in oil prices  if Israel attacks Iran to thwart its pursuit of nuclear weapons. An attack would  drive gasoline over $5 a gallon and raise the average cost of filling up for  each U.S. household by $1,000 a year. Such a shock would lower the growth in  U.S. GDP next year from around 2% to 1%, leaving the economy one adverse event  away from a recession. Although the chances for an attack in the coming weeks  are lower since Israel agreed to another round of diplomacy, the risk can’t be  ignored.

http://www.kiplinger.com/columns/practical-economics/archives/economy-improving-2012.html

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