US economy: Back on track?

The job market is healthier. Americans are spending eagerly on holiday gifts. A long-awaited turnaround for the depressed housing industry appears to be under way. Gas is cheaper. Factories are busier. Not bad for an economy faced with a debt crisis in Europe and, as recently as this summer, scattered predictions of a second recession at home. Instead, the economy has grown faster each quarter this year, and the last three months should be the best.“Things are looking up,” says Chris Rupkey, chief financial economist at the Bank of Tokyo-Mitsubishi UFJ.When The Associated Press surveyed 43 economists in August, they pegged the likelihood of another recession at roughly one in four.There was plenty of reason for gloom. A political standoff over the federal borrowing limit brought the United States to the brink of default and cost the nation its top-drawer credit rating. Most analysts now rule out another recession. They think the economy will grow at an annual rate of more than three per cent from October through December, the fastest pace since a 3.8 per cent performance the spring of 2010.Many economists still worry that the year-end surge isn’t sustainable, in part because the average worker’s pay is barely rising. And Europe may already be sliding into a recession that will infect the United States.Yet for now, the economy is on an upswing that few had predicted: The number of Americans applying for unemployment benefits came in at 366,000 last week, down from a peak of 659,000 in March 2009. Even in good economic times, the figure would be between 280,000 and 350,000.Employers have added at least 100,000 jobs five months in a row, the longest streak since 2006. And the unemployment rate fell from nine per cent in October to 8.6 per cent last month, the lowest since March 2009.Small businesses are hiring again, too, according to the National Federation of Independent Business. Business is up at AG Salesworks in Norwood, Massachusetts, which helps technology companies like Motorola find new customers. The firm has hired 26 workers to restore its staff to 56, erasing the job cuts from the recession. Chief executive officer Paul Alves plans to add an employee or two a month as long as growth continues.“I do see more confidence than I saw 12 months ago,” Alves says. “But it’s good, not great. Robust isn’t the word I’d use.” SpendingThe holiday shopping season has turned out better than anyone expected. Sales from November through Saturday were up 2.5 per cent. Americans have spent $32 billion online, 15 per cent more than a year ago. Retails sales were up in November for the sixth month in a row. People are spending, in particular, on clothes, cars, electronics and furniture. Consumer confidence.Americans felt better about the economy in November than they had since July, according to the Conference Board, a business group that tracks the mood of consumers. The board’s consumer confidence index climbed 15 points to 56 in November, the biggest one-month jump since April 2003. During the Great Recession, the index fell as low as 25. “It seems like the confidence of the traditional American consumer is higher right now,” says Jim Newman, executive vice-president of operations at the digital marketing company Acquity Group, which has added 100 jobs since summer. Gas Falling prices at the pump have freed more money for consumers to spend on appliances, furniture, vacations and other things that help drive the economy. The national average for regular unleaded has sunk to $3.21 a gallon (85 cents a litre) since peaking at $3.98 ($1.05 a litre) in May, according to the AAA Daily Fuel Gauge. Inventories.Businesses are restocking shelves and warehouses, more confident that customers will buy their products. In October, their inventories were up 8.7 per cent from a year earlier. An increase in inventories is expected to account for perhaps a third of growth this quarter.Once they peer into 2012, economists turn cautious. Bernard Baumohl, chief economist with the Economic Outlook Group, says that stronger consumer spending “is absolutely unsustainable... Wages have not kept pace with inflation all year.”The government says that once you adjust for inflation, weekly earnings dropped 1.8 per cent from November 2010 to last month. Consumers have used savings or credit cards to finance their purchases. Once bills come due in early 2012, Baumohl foresees a cutback in spending.Baumohl is so pessimistic that he expects the US economy to shrink at a 0.2 per cent annual rate in the first three months of 2012 and to end the year with no more than 1.8 per cent growth.Europe is almost sure to slide into recession, even if its policymakers find a solution to the continent’s debt crisis. In the worst case, a chaotic breakup of the euro currency could ignite a worldwide financial panic.Joe Echevarria, CEO of the accounting and consulting firm Deloitte LLP, says his company’s clients are delaying hiring or expansion decisions to see if Europe’s crisis will be resolved.Another worry — again — is Washington. President Barack Obama and Republicans in Congress still had not broken their impasse on Wednesday on how to extend a Social Security tax cut. Without an extension, taxes will go up $1,000 in 2012 for someone making $50,000.Failing to extend the tax cut, combined with the end of long-term unemployment benefits and other federal budget cuts, could shave 1.7 per cent points from growth in 2012, warns Mark Zandi, chief economist at Moody’s Analytics.Forecasters are also chastened by the past two years. Since the Great Recession officially ended in June 2009, the economy has stalled twice just when it appeared to be gaining momentum.In mid-2010, businesses slowed spending sharply. This year, the damage came from protests in the Middle East that drove oil prices higher, the earthquake in Japan, budget cuts by state and local governments and the stalemate in Washington.But Joel Naroff of Naroff Economic Advisors says he thinks the fears about next year are overblown and the economy will grow three per cent in 2012. Next year will be all about jobs. If job growth keeps accelerating, the economy is much more likely to meet Naroff’s predictions than the pessimists’.In addition, Naroff says, that’s because consumers and businesses have grown more confident. If Europe averts disaster — a crackup of the eurozone — and endures only a mild recession, as Naroff expects, the impact on the United States will be minimal, he says.