Popular Economics Weekly
The March unemployment rate held at 9.7 percent, and 162,000 payroll jobs were added to payrolls. We believe this marks a turning point. Employers were hiring in all areas, including 48,000 temps hired by the Census Bureau for the 2010 population count. Even 15,000 construction jobs were added, with winter not over in many regions.
Barron’s Gene Epstein in a recent column says that manufacturing is leading the recovery at this stage, with the ISM index jumping to a “cyclical high” of 59.6 percent. Such a reading would translate to a 5.4 percent increase in Q1 GDP, after a 5.6 jump in Q4 2009. If in fact two such quarters of growth should happen (we won’t know until end of April), it will be a more robust recovery, rather than the subpar one currently forecast.
The service sector is not far behind as the ISM’s non-manufacturing index, at 55.4, shows solid month-to-month acceleration in March for the third month of growth in a row. New orders lead the report with a really hot 62.3 reading for the sharpest month-to-month acceleration in five years. Export orders are especially strong, jumping more than 10 points to 57.5, offering further evidence that demand strength out of Asia is pulling the global economy forward. Backlog orders are also rising, at 55.5 for a 9-1/2 point gain in the month.
The true measure of strength for consumers is the wages and salaries component of personal incomes, as we said last week, which jumped 0.4 percent in the latest month after edging up 0.1 percent in December. Both personal income and the wages and salaries component are still sluggish on a year-ago basis with personal income up just 1.1 percent in January and the latter component down 1.1 percent. But real, after inflation, personal consumption expenditures have in fact been improving since January 2009
The jobs picture provides a clue to the ‘U’ shape of this recovery. In fact, we could see a return to normalcy by December 2010, versus the 47 months it took to reclaim the 5 million jobs lost in the 2001 recession.
Though it may sound repetitious, so much of what happens in 2010 will depend on the consumer. Consumer spending is warming up with chain store sales rising 4.7 percent annually, but spirits, a reflection of the jobs market, are chilled. Reuters/University of Michigan consumer sentiment index slipped back in the mid-March reading to 72.5 vs. February’s 73.6. Both current conditions and expectations are down with expectations showing particular weakness. Expectations are the leading component and are pointing to extended weakness ahead. Inflation expectations are subdued at 2.8 percent one-year out.
All of this really means that 2011 could be the year real estate, which is most dependent on a job recovery, recovers as well. The key will be to work off the excess inventory of so-called ‘distressed’ homes—possibly 5 million, according to Fannie Mae. But even that number of potential defaults and/or short sales could drop if as we believe hiring picks up substantially this year.
Harlan Green © 2010