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U.S. Fears Another Summer of Recovery Promise Unfulfilled

Irwin M. Stelzer

Summer is approaching in the US and nerves are jangling. In recent years the green shoots of the early months of recovery withered in the heat of summer.

A long queue of people are worried that this summer will be another in which a recovery is aborted: the unemployed, retailers, investors, President Barack Obama and his team, incumbent politicians of both parties, home builders and car salesmen to name a few.

But Mitt Romney, although not one to wish the nation ill, would be less than human if he did not feel a frisson of excitement at every bit of news that suggests the green shoots of recovery won’t flower until after the November elections.

The gloomy jobs report of last week provided the battling Republican contender with just such a frisson.

Only 115,000 US jobs were created in April, and the unemployment rate dropped from 8.2 per cent in March to 8.1 per cent—the lowest level since Obama took the oath of office in 2009—only because thousands more workers gave up the job hunt.

If those discouraged job-seekers had remained in the hunt for work, the unemployment rate would be in double digits.

GDP, which grew at the satisfactory rate of 3 per cent in the final quarter of last year, managed only a tepid 2.2 per cent growth in the first quarter of this year. That’s half the growth rate of all recoveries since World War II.

Some economists estimate that unseasonably warm weather—the warmest since 1895—added 0.2 per cent to growth.

Worse still, 0.6 per cent of the first-quarter growth in output merely swelled the inventories of unsold goods.

Subtract the weather and inventory build-up, and growth comes to a measly 1.4 per cent.

Business investment declined at an annual rate of 2.1 per cent. It was a bad start to the year—bad enough in the words of The Wall Street Journal “to give the word recovery a bad name.”

To make matters worse, Europe is sinking into recession—after an 11th monthly increase, the unemployment rate is 10.9 per cent and rising—and France has been added to Spain as a country too big to fail but too big to save.

That won’t help US exporters already staggered by the speed of the slowdown in demand from China.

There is some good news. Corporate profits in the first quarter topped last year’s level by more than 6 per cent, or more than 4 per cent if Apple’s huge profits are taken out of the figures for the 500 companies in the Standard & Poor’s index.

About 70 per cent of the S&P 500 companies beat the analysts’ estimates.

Better still, most of the improvement comes from US operations, offsetting the weakness that companies such as General Motors, UPS and Starbucks report for their European businesses.

But note that the first quarter figures are a three-month average, with January and February doing better than March, in which monthly orders for durable goods recorded their largest drop in three years, and factory production declined, perhaps presaging a slowdown.

Or perhaps not. The very latest data suggest the recovery remains on course, not at a rate that creates enough jobs, but one that permits the President to claim he has turned around the recession he inherited.

The University of Michigan index of consumer sentiment rose a bit in April, as households’ assessment of economic conditions and their expectations of the future both lifted.

With 16 of the 18 industries in the Institute for Supply Management’s index reporting gains, activity in the manufacturing sector increased for the 33rd consecutive month, and at the fastest pace since June last year.

Most importantly, the new orders index, an indicator of the level of activity in coming months, jumped.

“Encouraging,” say Goldman Sachs economists. And private-sector spending rose sufficiently to offset a fall in state and local government spending.

Then there is the housing sector, always the most difficult to analyse, in no small part because several indexes are published and often point in different directions.

The fairest summary seems to be this: prices have stopped falling, and if prices paid for foreclosed (repossessed) properties are excluded, might be rising a bit. The inventory of foreclosed houses that overhangs the market is being worked off as investor groups buy them up for refurbishment and conversion into rental units.

The rise in pending home sales (deals not yet closed) means that new-home sales and sales of existing homes will rise in coming months, and realtors in some cities have already begun complaining about a lack of properties to show potential buyers.

The supply of homes that are empty and waiting to be sold is down, as is the apartment vacancy rate.

The recovering US economy has stimulated the rate of household formation—the sighs of relief you might hear are parents regaining control of their TVs and fridges.

There are 1 million more households in the US than at this time last year, the largest rise in six years. Construction of new homes is scheduled to increase by about 24 per cent this year.

All of these figures do not represent a return of the glory days before the housing bubble burst. Mortgages are still difficult to come by, and more foreclosures are in store.

But, along with my conversations with builders, they suggest the worst is over and the housing sector will not be the drag on the economy it has been for the past several years.

Moreover, the recovery seems to be spread across the country and the price brackets.

In Phoenix, Arizona, perhaps the hardest-hit market, prices fell by more than 50 per cent.

Now realtors report multiple bids on lower-end houses. At the other side of the country and the price spectrum is New York City, a magnet for foreigners who are gazumping local billionaires, who bid a mere $US40 million ($39.4m) for top-of-the-line condominiums—with the record sale so far this year topping $50m. Small change by London standards, but enough to make more than a ripple in the Big Apple property market.

We know this: a sluggish US economic recovery is continuing, but one so far incapable of creating enough jobs for those who want full-time work.

What we don’t know is where we are heading in the next several months.

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