After moving along in fits and starts since the last recession officially ended in 2009, the U.S. economy seems finally to be gaining momentum. Several key indicators have shown marked improvement recently and may be one reason stock markets have surged since the first of the year.
One economic indicator, the Institute for Supply Management’s Non-Manufacturing Index (NMI), is relatively new and tends to get scant attention, according to independent economist Fritz Meyer. Yet because it shows the economic activity of non-manufacturing companies—increasingly important as the United States becomes more of a service economy—it’s an important barometer. The NMI shows business activity improving between January and February by 3.1 percentage points, and new orders were up by 1.8 percentage points during the same period.
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Meanwhile, global car sales seem to be recovering after being hurt by last year’s Japanese earthquake, and U.S. housing starts remained near a three-year high in February. The prolonged real estate slump has been one of the major factors slowing down the U.S. recovery, and the latest report from the U.S. Commerce Department showed that builders broke ground in February at an annual rate of 698,000 homes, down just 1.1% from a January figure that was revised upward to 706,000—the best performance since October 2008. Meyer finds this trend encouraging because housing improvements tend to reverberate through the economy, putting large numbers of people back to work.
Indeed, non-farm payroll jobs showed a net gain of 227,000 in February, according to the U.S. Bureau of Labor Statistics, marking the third consecutive month of strong expansion. The household employment survey, a separate measurement that reflects private sector job growth, was also heartening, with an increase of 847,000 jobs in January and 428,000 in February.
If the employment picture continues to improve, that could bode well for consumer spending, which is responsible for 70% of gross domestic product growth. Since the financial crisis in 2008, households have been working to reduce profligate spending and pay down heavy debt loads, and now it appears they have succeeded to the point that they’re borrowing again, though at a much more sustainable pace. During the final quarter of 2011, there was a 0.3 percentage point rise in household debt—the first increase since the second quarter of 2008.
Taken together, all of this data suggests to Meyer that the economy is improving significantly, and he points to the Federal Reserve’s projections of 3% growth in GDP this year and between 3.5% and 4% expansion in 2013. Growth at those levels would be much stronger than we’ve seen during the past couple of years and could indicate a recovery that’s finally hitting its stride.
Looking at the longer-term outlook for the economy, Meyer downplays concerns about the impact of having vast numbers of Baby Boomer’s exiting the job market during coming years—a demographic trend that many people expect could overwhelm Social Security and Medicare and leave subsequent generations with the unfair burden of paying for their parents' retirement. Meyer notes that the young people of the so-called Echo Boom generation, now in their early to mid-20s, have numbers that rival those of the post-World War II generation and should more than adequately replace the earlier group in the job market, easing the strain on federal entitlement programs and the economy at large.
What, if anything, could knock the recovery off track? Many people have pointed to the recent rise in oil and gasoline prices, which can siphon off increasing amounts of household income and reduce spending on other goods and services. However, Meyer notes that gas prices make up only about 4% of household expenditures for those in the upper income brackets—and those are the consumers to watch the most, because they have the most disposable income and contribute most to consumer spending and economic strength.
A greater worry could be what Meyer calls a “debt bomb”—the result of continuing federal budget imbalances. If tax rates continue to be low, a 30% cut in Medicare reimbursement is not enacted, and entitlement spending continues at its current rate, the U.S. could find itself with $10 trillion in debt—far more than the currently projected $4 trillion and a “scary situation,” Meyer says. But for now, at least, most indicators point to the economy continuing to gain strength, a long-awaited and welcome development.