Long-term yields for U.S. Treasuries should indeed firm but be tempered by a slowing as this phase o...
So, yes, we've got an economic recovery, but how strong is still an open question
04/05/2010 10:30 am EST
Friday’s news that the U.S. economy added 162,000 jobs in March was indeed good news. I think it does mean that an economic recovery is indeed underway.
But that’s always been just one of the three big questions about the economy as it recovers from the Great Recession.
And two of those questions remain unanswered. And since the answers hang on the U.S. consumer, they’re likely to stay unanswered for months yet.
We do, however, have a clearer picture now than, say, six months ago, of what consumer behavior to look for in order to answer those questions.
In the hours after—and in one case before—the Department of Labor announced that the economy had added 162,000 jobs in March, economists such as those at the National Bureau of Economic Research conceded that the economy had probably moved out of recession. Economists who work for the Obama administration, such as Larry Summers, senior economic advisor to the President, were understandably more optimistic. Speaking in London before the numbers were released, Summers said “I think the economy appears to be moving towards escape velocity.”
The recession does indeed appear to be over. Question One answered.
But we still don’t know how fast the economy will grow in the recovery (Question Two.) Or if the economy will steadily accelerate from the bottom or go into a stall (and grow at a significantly lower rate) sometime in the next quarter or three (Question Three.)
The debt-laden, cash-strapped, and deeply worried U.S. consumer holds the answer to those two questions. So far what we’ve seen in the jobs numbers, in the durable orders, in the ISM purchasing managers survey is evidence that the manufacturing sector of the U.S. economy is going strong. But that sector is relatively small—consumer spending makes up 60%-70% of U.S. economic activity—and it can’t keep growing unless consumers start to step up and buy what manufacturers are producing.
Recent government numbers suggest that consumer spending will grow by 3% in the first quarter of 2010. That would be a big improvement from the 1.6% increase in consumer spending in the fourth quarter of 2009.
But as impressive as that increase is, it’s not enough. Economists estimate that to drive the recovery so that the economy approaches its speed limit will require an increase in consumer spending of 4%. Anything less and the economy could keep on growing but at an anemic rate.
And it’s by no means certain if consumers will be able to keep up even that 3% level of spending increase—remember the full unemployment rate, the one that includes discouraged and part-time workers looking for full time work, stands near 17%. And it actually rose in March.
Some economists say we could see the rate of increase in consumer spending drop back near 2% in the second half of the year. That would be enough to keep the economy growing—so no double dip recession—but not enough to reduce unemployment at all quickly.
A recovery like that would feel like no recovery at all to millions of families.
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