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Another (Half) Step Forward
By: Dr. Charles Lieberman
Date: 2/8/2010
It is hardly a surprise that the decline in the unemployment rate to 9.7% in January employment report garnered all the attention, while key underlying gains went largely unnoticed. Beneath the surface, the economy continues to gain momentum.
Payrolls fell by 20,000, but bad winter weather contributed to the 75,000 decline in construction jobs, which obscured gains elsewhere. Manufacturing posted its first gain since 2007, while retail trade and business services also provided solid increases. The lengthening workweek reinforced the notion that business needs to resume adding labor to meet demand. GDP has picked up at a solid pace for two quarters so far, yet payrolls continued to decline. That disparity is not sustainable. And demand should continue to grow, as the longer workweek and rising wage rates implies another gain in household income, while inflation remains low. This is critical because rising real incomes are needed to sustain growth in consumer spending. As households resume spending, firms will come under more pressure to hire to be able to meet that rising demand. At that point, the expansion becomes internally self-reinforcing.
Other data also point towards economic growth. Manufacturing and nonmanufacturing supply management surveys are both well above 50. Manufacturing orders have increased. Tech companies report better than expected earnings, but also report that demand is increasing strongly. Around 75% of all S&P 500 companies reported higher than expected profits, the fourth consecutive quarter that earnings exceeded expectations. In time, likely within the next few reports, employment should turn positive, adding to the momentum of the expansion.
What could derail this improving trend? The turmoil in Greek markets could spread to the rest of Europe, disrupting credit availability and spending. A weak European economic recovery could easily be disrupted. Unlike the turmoil that followed and built over time following Bear Stearn's mortgage losses, Europeans are likely to act strongly to prevent a Greek default and to calm markets. German and French finance ministers announced this weekend they will make sure that Greece adheres to the budget cuts that are being promised to reduce Greek deficits. Still, risk spreads have increased in Europe and that will induce caution, even if rates are not really high enough to discourage investment. The European situation needs to be monitored, but it is premature to assume things will unravel at this point.
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