Recovery?

Yet another sign today that the US may be on the road to recovery: the US grew at an annualized rate of 2.8% last quarter.  This is good news considering where we have been these last few years, but not good enough to may anyone feel good about the staying power of such a trend.  And the trend itself isn't good enough: at a 2.8% rate we'll be lucky to keep up with jab market growth - so we won't be making any real progress on unemployment.  But if this presages a more robust recovery, and if Europe doesn't slide into serious recession and drag us down with it, then it is good news.

As you can tell, all of the qualifiers are the problem.  But it is much better to be fretting over whether this positive momentum can be maintained and accelerated than wondering when the economy will hit bottom. Unlike recovery of years past, this does not look like one that will have a sharp and rapid recovery.  Just about everyone, myself included, think it is going to take a very long time.

One interesting aspect of the current growth is that businesses have become a little more bullish on the future, building up inventories, but consumers are not keeping pace.  There is a concern that unless consumers jump back into the market, the whole thing will sputter.  From The New York Times:

Growth in the fourth quarter ... was driven mostly by companies rebuilding their stockroom inventories, and not by consumers who were shopping more or foreign businesses buying more American-made products. And companies are likely to have only so much appetite for refilling their backroom shelves if consumers are still unwilling to buy those products.

Consumer spending rose at an annual pace of 2 percent, slightly better than the 1.7 percent in the previous quarter, Friday’s report showed. But based on early data, it looks as if consumer spending deteriorated toward the end of the year. This may be because of unseasonably warm December weather, which probably lowered families’ household electricity and gas bills, said Jay Feldman, an economist at Credit Suisse.

But the investment in inventories should help incomes and employment which, in turn, should help spur more consumption - so there is reason for some optimism there. And there is evidence that both orders for durable goods are up, and that credit for small business is easing, as the general level of confidence in the recovery grows. But then there is the old bugaboo of sharp cuts in government spending:

One of the biggest drags on growth in the last quarter was government spending cuts at the federal, state and local levels, according to the Commerce Department report. National defense spending fell a whopping 12.5 percent, for example, an unusually large dip that economists do not expect to see repeated in the beginning of 2012. Strapped state and local governments are likely to continue cutting back in 2012, as they have done nearly every quarter for the last several years.

So as long as state and local governments are still cutting and Europe is still dealing with a potentially debilitating crisis, we are unlikely to see really strong growth. I guess we'll have to be satisfied with what we can get in the interim.

Just When I Try to be an Optimist...

...more bad news.

The number of Americans applying for first-time jobless benefits rose last week, the Labor Department reported on Thursday, reversing a recent decline and suggesting the labor market remained brittle.

Separately, the Commerce Department said retail sales rose at the weakest pace in seven months in December, as consumers pulled back toward the end of the holiday shopping season, cutting purchases at department stores and spending less on electronics.

Both of which suggest that we are still bumping along the bottom of the deep hole we have dug - a little up then a little down.

Closer to home this is disturbing:

The UO Index of Economic Indicators, which tracks state and national data, declined more than 2.75 percent in November, the fourth consecutive month it’s fallen that much.

Oregon temp hiring fell that month, as did trucking activity in the state – as well as national manufacturing orders, consumer confidence and the interest-rate spread.

But in two positive signs, Oregon residential building permits increased in November and initial unemployment claims fell. Yet the declining claims haven’t translated into hiring gains. So while the national economy has added jobs recently, Oregon payrolls have moved sideways since February.

Sigh.

Credit Ratings, Austerity and Markets

This is essentially what I said on KGW last night, but my take on the whole S&P downgrade is that the S&P action was essentially a non-action.  There is no new information out there that they revealed, they simply gave their opinion about the chance of a US default which is slightly higher now that Washington has revealed a new and higher level of disfunction.  The S&P statement was a political statement, not an economic one.  

So why have markets crashed?  It has everything to do with the global economic malaise and new threat of recession, especially coming from the Euro zone but also created by the debt ceiling deal's new spending cuts.  Cutting government spending in the midst of a recession cuts aggregate demand right at the moment the economy can least afford it.  I think investors are now very jittery as both Europe and the US are on similar trajectories - stumbling economies and new austerity measures.  The future does not look good at the moment.

I think the evidence in support of this comes from the fact that as investors were shedding equities, they were gobbling up US Treasuries, driving the 10 year T-Bill yield to a new yearly low.  This is the very security the S&P just downgraded - which demonstrates just how meaningless the S&P's action was in that sense.

I don't think the timing was entirely coincidental, however, the S&P action was still a shock to a system that is hyper-sensitive right now.  

Finally, I don't think you can take the markets' downturn as any evidence of an impending return to recession and in fact, as I said last night, I don't think it matters whether we return to slightly negative growth or stay with anemic positive growth: both imply unacceptable levels of long-term high unemployment.