“But soft, what light through yonder window breaks?” Is it possible that the sun is finally breaking through the clouds that have blanketed the economy for the past five years? It is always dangerous to read too much into a single report or a series of them, but it is hard not to detect a brightening sky in the positive economic data that have been accumulating with reassuring consistency over the past few months, topped most recently by the January employment report.
Employers added 243,000 jobs for the month, according to the Labor Department report, creating jobs at the fastest pace in nine months and pushing the unemployment rate from 8.5 percent to 8.3 percent — its lowest level in nearly three years. The gain came despite an inflow of job seekers, drawn by growing evidence that the employment market is improving, and it followed an adjustment in the November and December reports, reflecting 60,000 more jobs added in those months than previously reported.
The Labor Department’s household survey was even more positive than the employer survey on which the unemployment rate is based, as more than 630,000 respondents said they had found employment in January — the largest one-month gain since the recession began five years ago. The six month employment gain of nearly 2 million workers was the highest since August, 2005, when the unemployment rate was a much healthier 4.9 percent, a Reuters report noted. Economists say the household survey is a more accurate indicator of economic turning points, signaling when a recession is coming and when a growth spurt is about to begin.
Economists – even those who line up on the more optimistic side of the analytical divide – were almost uniformly surprised by the stronger than expected employment gains.
A Turning Point
"I think this is a sign that maybe the economy is reaching that holy grail of a self-sustaining economic expansion," Stuart Hoffman, chief economist at PNC Financial Services in Pittsburgh, told Reuters Insider.
"There is more horsepower to this economy than most believe," Sung Won Sohn, an economics professor at California State University, agreed, telling CNBC, "The stars are aligned right for a meaningful economic recovery."
A Long Way from Fixed
Federal Reserve Chairman Ben Bernanke sees more ambiguity in the recent employment report than the enthusiastic reaction to it reflects. His primary concerns: The “unusually high level” of long-term employment, and the large number of disappointed workers who have either accepted part-time employment in lieu of the full-time positions they can’t find, or have stopped looking for work entirely.
“We still have a long way to go before the labor market can be said to be operating normally,” Bernanke told the House Budget Committee at a recent hearing.
The lower unemployment rate, while welcome, he noted, looks somewhat less encouraging given the current “participation rate” – the percentage of the working-age people in the labor force – which has declined to the lowest level in nearly three decades. Against that backdrop, “the 8.3 percent [unemployment rate] no doubt understates the weakness of the labor market in some broad sense,” Bernanke cautioned.
Even with that caveat, it is possible to be somewhat more encouraged by the employment data than Bernanke appears to be. The Labor Department’s monthly employment report for December showed the number of people working full time (113.8 million) was higher than it has been since February 2009, while the number of workers posting fewer hours than they wanted declined to the lowest level since January of that year.
“It’s what will traditionally happen when the job market overall is beginning to improve,” Tig Gilliam, chief executive officer of Adecco Group North America, told Bloomberg News. The increase in full-time workers will boost income levels, Gilliam and others note, laying the groundwork for stronger consumer spending this year.
Consumers: Ready to Spend?
There’s hasn’t been any clear evidence of that spending surge yet, however. Spending overall was actually flat in December, despite a significant increase in income, suggesting to many analysts that consumers remain cautious about the economic outlook, and more inclined to save than to spend.
On the other hand, consumer borrowing rose by $19.3 billion in December following a roaring $20.4 billion gain in November — the largest monthly increases in a decade, suggesting that consumer spending may be considerably more robust in the first quarter of this year than it was in December.
Some analysts warn that the growth in consumer borrowing may reflect an effort to compensate for sluggish wage growth rather than growing confidence in the economic outlook – but it appears that the accumulation of better economic news is beginning to seep into the consumer consciousness.
The Thomson/Reuters/University of Michigan’s preliminary consumer confidence index rose to 74 in January from 69.9 in December, topping the consensus forecast and marking the fifth consecutive gain for this barometer, now at its highest level since May of 2011.
Fannie Mae’s monthly national housing survey also found consumers feeling better in January, with 40 percent of the respondents now saying they expect their personal financial circumstances to improve this year, and more than 20 percent saying their income is “significantly higher” than it was a year ago.
Significantly, both confidence measures had begun to move up before January’s strong employment report was released. That report, on top of others showing gains in manufacturing, durable goods orders, and business spending plans, have led many economists to increase their growth projections for the coming year. The Bank of America forecast, for example, now anticipates average growth at 2.1 percent during the first half of this year, up from 1.8 percent just a few months ago.
Housing Less Beleaguered
Even the beleaguered housing market is beginning to look slightly less beleaguered to some – this despite a dismal year for home builders, who sold only a little more than 300,000 new homes last year – the fewest since the Commerce Department began keeping these records.
Given that performance, the recent rise in home builder confidence — to the highest level in nearly four years — seems a bit odd, to say the least. But builders are looking forward – not at last year’s sales, but at permits for new homes and construction starts, which increased by 7.8 percent and nearly 25 percent, respectively, in December, compared with the same month in 2010. And even the 2011 figures were looking less grim toward the end of the year, as new home sales began to trend upward.
Existing home sales posted their third consecutive monthly increase in December, hitting an 11-month high, while the inventory of unsold homes declined. Although home prices continued to slip at year-end, and are expected to decline by another 5 percent or more overall this year, an increasing number of housing markets appear to be stabilizing. The “Improving Markets Index” published jointly by the National Association of Home Builders and First American now includes 98 metropolitan areas, 29 of them added in February alone.
"It seems that the housing sector may be slowly picking itself up off of the mat," Omair Sharif, an economist at RBS, told Bloomberg News recently.
No one is proclaiming the housing market healed, or anywhere close, but there appears to be a growing consensus that a recovery is finally under way. New York Times columnist (and Nobel Prize winning economist) Paul Krugman, sees evidence that six years of devastating declines have pushed home prices back to their pre-bubble levels, while record-low new construction rates have left the country “seriously underprovided with houses, at least by historical standards.”
Krugman sees in that outline reason to hope that the vicious cycle – in which the devastated housing market impeded the economic recovery, further depressing the housing market and further impeding the recovery – will be replaced by “a virtuous circle: An improving economy leads to a surge in home purchases, which leads to more construction, which strengthens the economy further, and so on. And if you squint hard at recent data, it looks as if something like that may be starting,” Krugman wrote in a recent column. “Home sales are up, unemployment claims are down, and builders’ confidence is rising.”
Krugman also made it clear that he was not suggesting “all is well,” by any means. Even under the best of circumstances, he noted, “it will be years before we get to anything resembling full employment,” which means it will also be years before the housing market can be described as truly “healthy” again. But it appears that housing and the economy are on a sustainable path – far still from where we want them to be, but moving now with some momentum and (until something happens to change the trajectory), heading finally in the right direction.
