Sunday Times (London)
April 4, 2010
by Irwin Stelzer
The gloom is dissipating. The jobs market is improving: 162,000 new jobs were created in March. Factor out the 48,000 hired temporarily to help with the census, and you still have positive growth. Employment in the hard-hit construction industry — which lost 864,000 jobs in the past 12 months — held steady, while jobs were added in manufacturing, mining, healthcare and temporary services.
But not all the news is good: the number of people out of work for more than 27 weeks rose to 6.5m, the unemployment rate remains stuck at 9.7%, and the total unemployed, involuntarily underemployed and too discouraged to look for work rose, and now constitute 16.9% of the workforce.
Still, the resumption of job creation is good news, and only one of the signs that the recovery continues. Share prices in the first quarter were up about 5%, their best start in more than a decade, as corporate profits came in better than expected after rising 8% in the fourth quarter of 2009, and corporate balance sheets remained strong. Bonds also did well, with investment-grade US debt and junk bonds up from their 2008 lows by 35% and 82%, respectively. So far, the fear that huge fiscal deficits will trigger inflation, a rise in interest rates and therefore a fall in bond prices, seems to be confined to a minority of investors. The majority are ignoring what might be the canary in the coal mine — a rise in interest rates demanded by purchasers of US government bonds. The yield on the Treasury’s 10-year note is hovering round the psychologically important 4% level, the highest since June 2009.
The performance of share and bond prices contributed to a recovery in consumer confidence after a sharp fall in February — it rose from 46.4 to 52.5 in March (1985=100). Which might explain last month’s spurt in car sales. General Motors’ sales of brands it intends to keep were up 43% year-on-year, Ford sales were up 40%, Toyota used incentives (discounts) of $2,256 per vehicle to drive sales up 41%, and although Chrysler’s sales fell 8%, the company expects to break even this year.
The good news was not confined to the motor sector. Overall consumer spending is growing at an inflation-adjusted annual rate of 3%, the highest since the first quarter of 2007. Rosalind Wells, chief economist at the National Retail Federation, says “consumers are coming back to life a little”. With mortgage defaults and personal bankruptcies rising, relieving many consumers of debt and mortgage payments, those consumers have more cash to spend.
The Institute for Supply Management (ISM) reports that the manufacturing sector as a whole grew in March for the eighth straight month, and at the fastest pace since July 2004, to a six-year high. Seventeen of eighteen industries reported growth (only plastics lagged). Exports were up, as were inventories, the latter in anticipation of restocking by retailers and higher sales. A global survey of 11,000 companies by KPMG shows mounting optimism, with American manufacturing and service sector firms the second most optimistic (Brazilian ones were first). That confidence accounts for the increase recently recorded in business investment, which just might drive growth if consumers retreat from the malls again.
Most forecasters are guessing that when the final numbers for the overall economy are in, they will show that it grew at an annual rate of about 3% in the first quarter of this year, below the 5.6% rate of the final quarter of last year, but more than satisfactory. Several businessmen, some of whom were in the pessimist camp until recently, are now talking to me about a V-shaped recovery, a rebound of vigour and duration.
That view is not uniform. Small-business owners and entrepreneurs are somewhat gloomier. Some do not do much or any export business, and so are not sharing in the recovery of world trade. Many complain that their banks don’t want to know them when they ask for credit. Others worry that the president’s healthcare bill will drive up their insurance premiums. Still others know that the taxes on their personal incomes are due to rise, reducing their incentive to invest and hire.
Then there is the housing market, which remains an enigma. There are signs of stability. Twelve of the 20 cities covered by the S&P/Case-Shiller index of home prices show modest increases, and the overall index has risen for eight consecutive months, to almost year-ago levels for the first time in three years. Big publicly traded builders are again buying construction-ready lots. Warren Buffett, whose Berkshire Hathaway owns Clayton Homes, a maker of manufactured housing, predicts that “within a year or so residential housing problems should be behind us”. Investors are among the optimists: homebuilders’ shares have nearly doubled over the past year.
They may be in for an unpleasant surprise. New home sales are still lagging, the supply of unsold homes remains high, the tax credit for first-time buyers expired last week, at the same time as the Federal Reserve Board discontinued its $1.4 trillion programme to purchase mortgage-backed securities. The housing market is key to creating construction jobs, and all the jobs that go with furnishing a home.
If these headwinds prove too strong, the arrival of spring will see the bears emerge from hibernation, especially if the recovery proves to be only “a sugar high” based on unsustainable government spending and low interest rates, which the bond vigilantes will, sooner rather than later, drive up.
My own guess is that the recovery will gather pace. If the Fed is to err, it will err on the side of waiting too long to “exit”. There is no sign that the government will rein in spending — increases are more likely — and a wall of money is sitting on the sidelines looking for investments or deals.
In the longer run, of course, we will have to pay the piper for the administration’s Greek-style fiscal policy. Meanwhile, enjoy the ride.
Irwin Stelzer is a Senior Fellow and Director of Economic Policy Studies for the Hudson Institute. He is also the U.S. economist and political columnist for The Sunday Times (London) and The Courier Mail (Australia), a columnist for The New York Post, and an honorary fellow of the Centre for Socio-Legal Studies for Wolfson College at Oxford University. He is the founder and former president of National Economic Research Associates and a consultant to several U.S. and United Kingdom industries on a variety of commercial and policy issues. He has a doctorate in economics from Cornell University and has taught at institutions such as Cornell, the University of Connecticut, New York University, and Nuffield College, Oxford.
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