Economic Notes: Out of the Woods, But Still in the Swamp
5/17/2010
By Patrick O'Keefe, Director of Economic Research, J.H. Cohn
Economic recovery broadened in April as consumer spending and industrial activity both continued to increase. Yet as the turmoil in Europe reminds, the economy may be out of the woods but financial conditions remain swampy.
Retail sales rose for the seventh consecutive month in April, although less robustly than in March. Americans opened their wallets widest to spruce up their houses (+6.9%), pamper themselves (+0.9%), and drive (+0.5%), but cut spending on most other consumables.
Retailers recorded their best year-on-year (+9.6%) gain since March 2000, but that comparison was boosted by auto sales well above last year’s depressed levels and a 38% rise in gasoline prices since last April.
Net of those components, merchant sales rose 5.6% over the year. While modest in comparison to previous recoveries, what explains the willingness of households to increase spending at all given the recovery’s modest job growth? (See "Mess Hall Rations.")
Perhaps it is because consumers see a more upbeat jobs picture.
The Bureau of Labor Statistics (BLS) produces two estimates of employment each month. The most widely touted number is derived from a survey of employers, the other from a survey of households.
Where the former indicates a net gain of 573,000 jobs so far in 2010, households report a rise almost three times as fast (+1.7 million).
While differences between the surveys are expected, the perceptions of households determine consumer spending. And, according to what they are telling BLS, their perception is that job growth is accelerating – hence their increased spending.
Industrial output increased in April, the tenth increase in the eleven months since it bottomed and the largest year-on-year gain in almost nine years. All components rose, except utility output which fell due to above-normal temperatures.
The manufacturing sector is expanding production to meet accelerating orders and restore their depleted inventories and those of merchants.
Global growth is adding to demand for American manufactures as well, although the nation’s trade deficit widened in April as imports rose faster than exports – due largely to the increasing demand for and price of oil (both a function of improving economic conditions).
Global growth is unevenly distributed, however. It is most robust among emerging economies and resource exporters, modest but sustainable in the U.S., and tepid and tenuous among the other advanced economies.
Yet risks remain, including most immediately the deterioration of public sector finances (here and abroad) and household indebtedness. Both were present, but preemptively unattended, during the serial crises of 2007 - 2009.
Now, with a self-sustaining recovery at hand, the economy is out of the woods – but still swamped by debt.
***
The statements, opinions, and conclusions contained herein are based solely upon the author’s own studies, research, and personal experience. Neither J.H. Cohn LLP nor the author makes any representation or warranty as to the accuracy or completeness of this information. J.H. Cohn LLP and the author expressly disclaim any liability for any loss or damage which may be incurred, of any kind whatsoever, as a result of or arising from the use of any of the information contained herein or reliance on the accuracy or completeness of it.