We’re looking at a “yes-but” economy. Yes, many sectors are improving steadily, but the improvements are: a) Not as great as analysts predicted; b) offset, or likely to be, by other negatives; c) too fragile to be sustained; or some combination of all of the above. Consider these examples from recent business news reports:
- “The U.S. economy grew briskly in the first quarter, but its pace was a little weaker than originally thought.”
- “Consumer anxiety [is easing], but some fear, not for long.”
- Home sales increased “but anyone expecting a robust rebound will be sorely disappointed.”
It’s not hard to imagine these folks telling friends who have just gotten big raises to consider the risk that they could be fired. True enough, but….
In fairness, the May employment numbers, which just about everyone expected to end up emphatically in the “yes” column, instead registered a resounding “but.” Payrolls increased by 431,000 for the month, but most of the increase (411,000) reflected the hiring of temporary workers for the 2010 census. Private sector employers added only 41,000 workers to their payrolls – far short of the gains economists had been predicting following the encouraging 218,000 increase in April.
“Hiring looks soft,” Michael Feroli, chief U.S. economist at JPMorgan Chase & Co., told Bloomberg News. “It does raise some red flags that businesses are still pretty cautious.”
More Positive Indicators
The red flags continue to wave, despite the positive indicators that have been accumulating steadily since the beginning of the year. With the exception of last week’s employment numbers, recent economic reports have been mostly encouraging:
- The nation’s Gross Domestic Product (GDP) increased at an annual rate of 3.2 percent in the first quarter, spurred by what an Associated Press report described as “the biggest advance in consumer spending in three years.” That spending increase – 3.5 percent – nearly doubled the fourth quarter increase of 1.6 percent
- After-tax corporate profits increased by 9.7 percent in the first quarter, up from 8.2 percent in the final quarter of last year and nearly 43 percent ahead in the year-over-year comparison.
- The Federal Reserve, which has hardly qualified as a Pollyanna of late, revised its growth forecast for the year to between 3.2 percent and 3.7 percent, up from the 2.8 percent to 3.5 percent range Fed economists were predicting in January. Still, Fed Chairman Ben Bernanke has emphasized that unemployment remains a major concern for policy makers and a continuing drag on the pace of the economic recovery.
- Durable goods orders increased by 2.9 percent in April, more than double the 1.3 percent gain economists had predicted and the best showing for this indicator in three months, providing further evidence that the manufacturing recovery is gaining strength.
- Factory orders registered their eighth consecutive monthly increase, rising by 1.2 percent in April after a 1.7 percent gain in March. “Business investment remains healthy,” Sal Guatieri, a senior economist at BMO Capital Markets, told Bloomberg. “Business capital spending will continue to lead the economy,” he predicts.
- The Institute for Supply Management’s (ISM’s) business barometer slipped a bit in May, registering 59.7 compared with April’s 63.8 ¾ a five-year high. Even so, the index remains well above the 50 mark dividing contraction and expansion.
- The service sector expanded for the fifth consecutive month. The ISM’s index of non-manufacturing business held steady at 55.4 in May, while the non-manufacturing employment gauge climbed to 50.4 from 49.5, reaching its highest level since the recession began. The business activity component of this index climbed to 61.1 from 60.3 in April, representing a four-year high.
- Industrial production increased by 0.8 percent in April, according to the Commerce Department, as factory output jumped by “a brisk” 1 percent and business inventories increased by 0.4 percent, adding to the 0.5 percent increase posted in February. “The manufacturing recovery is getting more diffuse,” David Heuther, chief economist for the National Association of Manufacturers, said in a report. “It looks more durable and deeper.”
Confidence Growing
The Conference Board’s Consumer Confidence Index increased to 63.3 in May from 57.7 in April, beating all estimates to reach the highest level in two years. Consumers became much more positive about the outlook for the next 6 months, boosting that component of the index to 85.3 from 77.4. The University of Michigan’s confidence index also increased in May, although only marginally – the first time in several months that both of these barometers have moved in the same direction. The Michigan report nonetheless produced another “but,” noting that consumers continue to express concerns about “a wide range of issues,” the employment outlook primary among them.
Those lingering concerns haven’t dampened consumer spending as much as might have been expected, however. Spending levels, in fact, had been increasing steadily all year until April, when they flattened, even though incomes posted a small gain. The spending reports have produced some of the largest “buts” from economists, who have pointed out that the gains have come almost entirely from the most affluent consumers with little input from the middle class. “The economy can grow if lower-income households aren’t able to spend, but it can’t flourish,” Mark Zandi, chief economist at Moody’s Economy.com, told the Los Angeles Times.
“Payback” Coming in Housing
“Yes-but” concerns also prevail in the housing market, where analysts agree that strong sales increases have been driven almost entirely by the federal home buyers’ tax credit. Existing home sales increased by 7.6 percent in April, new home sales jumped by 15 percent, and the National Association of Realtors’ pending home sales index increased by 6 percent, indicating that sales will remain strong for a few more weeks.
“But expect a payback in July and August,” Stan Humphries, chief economist for the on-line real estate database, Zillow.com, told MSNBC. “A lot of current demand in the marketplace has been stolen from those months,” he noted.
Although new home starts increased by nearly 6 percent in April, building permits, an indicator of future construction activity, slumped by 12 percent, spurring concerns that the housing recovery may stall. Adding to those concerns, inventory levels rose in April, despite the sales gains and home prices, which had shown signs of stabilizing, also seemed to lose ground in March, as the closely watched Case-Shiller index fell 0.5 percent below the February level. Year-over-year, prices in the 20-city index increased by 2.3 percent, but they were 3.2 percent below the reading for the first quarter of last year, leading economist Robert Shiller, co-founder of the index, to warn, “It looks like a double-dip already. There is a very real possibility of some more decline,” Shiller told MSNBC.
Some economists are resisting the ‘yes-but’ syndrome. The National Association of Business Economics found that the 46 economists responding to the group’s May survey have become a little more optimistic about the outlook, predicting that the economy will grow by 3.2 percent this year and next – a little better than April’s consensus forecast of a 3.1 percent growth rate for both years.
“Although risks involving [the sovereign debt crisis] in Europe have recently escalated, the outlook in this country has improved in most respects,” NABE President Lynn Reaser said in a press statement. “Growth prospects are stronger, unemployment and inflation are lower, and worries relating to consumer retrenchment and domestic financial headwinds have diminished.”
Of course, Reaser’s comments and the NABE survey came before the disappointing May employment report, and you know what that means ---Yes, some economists are more optimistic, but they’re going to be saying “yes, but” for some time to come.
