The conventional view is that the US economy remains considerably hampered by weak housing, employment and credit availability. Most
economists see continued slow growth with the principal risk being a double dip. Yet, I see many signs that suggest that the US economy is in fact about to accelerate. So far, most of the recovery in GDP was from the restocking of depleted inventory. However, there are more and more signs that final demand is strengthening.
THE US CONSUMER IS SPENDING
Consumption expenditures have grown at a 5.2% annualized rate during the 5 months to February 2010 and now surpass their 2008 peak. Quarter-to-date, growth is 4.3% annualized, including weather-affected February.
Retail sales rose 0.3% MoM in February, in spite of very bad weather on the East Coast and poor car and housing-related sales.
However, the Department-Store-Type-Merchandise sales keep rising, gaining 0.8% in February and 6.5% annualized in the past 4 months to almost reach their 2008 peak level. Americans may not be spending much on cars and housing but they still find their way to department stores.
Weekly chain store sales have been very strong in March: for the first 3 weeks of the month, sales are up 2.8% vs February.
Even car sales, whose sole sign of life was during the cash-for-clunker program last summer, are perking up in March. J.D. Power & Associates, an auto-research firm, is forecasting March U.S. sales will reach an annualized pace of 12 million cars and light trucks. ISI’s auto dealers surveys point to 11.2 million vehicle sales in March, a 15.6% gain YoY.
One of the arguments against stronger consumer spending was the so-called new frugality attitude in America. This view was amplified by the sharp rise in the US savings rate in 2009. many economists and pundits, including myself, thought that the imperatives of deleveraging would force the savings rate in the 5-7% range which would have severely hurt spending. The reality is that Americans are indeed saving more but not to the point of radically cutting their standard of living. In fact, the savings rate has been trending down for most of 2009!
EMPLOYMENT TRENDS IMPROVING
Payroll employment declined a less than expected 36,000 in February in spite of very difficult weather conditions. The household employment survey showed 308,000 additional jobs in February, following a gain of 541k in January.
Also encouraging was that the household survey showed two consecutive months of full-time job creation. This is the first such occurrence since the onset of the recession.
The March Philly Fed’s employment series improved to its highest since 2007. Haver Analytics calculates that during the last ten years, there has been a 90% correlation between the index level and the three-month change in manufacturing sector payrolls.
The Texas Fed survey was also positive for employment as labor demand among manufacturers improved in March. Eighteen percent of firms reported increases in employment, pushing the index into positive territory for the first time since July 2008. Hours worked and wages and benefits also increased.
In spite of the slow recovery so far and the continued weakness in employment, deleveraging ia happening pretty fast thanks to higher savings, defaults and low interest rates. The Fed’s Financial Obligation Ratio tracks monthly rents, credit cards and mortgage payments as a percent of disposable income. From 18.9% in early 2008, the ratio has dropped to 17.5% in Q4 2009, its lowesr level since Q3 2000.
BUSINESS SPENDING IS PICKING UP
Durable goods orders rose 0.5% in February, after a 3.9% jump in January. Ex-transport, new orders increased 0.9 percent.
Over the last 3 months, orders for durable goods have increased 28.1% while shipments rose only 7.0%. Non-defense capital goods orders, highly correlated with business investment, are up 58% in 3 months while shipments are flat. Manufacturing activity can only pick up with the rapidly accumulating backlog.
As the NBF chart below shows, shipments of nondefence capital goods are picking up much faster than they did after the 2001 recession. Back then, it had taken no less than three years for shipments to finally start rising. History shows that investment must come back before job creation materializes.
This chart is up to December; January is up another 1.6%.
Not to say that all is clear and rosy. To be sure, housing is still very weak, banks remain tight and the US fiscal situation looks troublesome going forward. But it does look like the momentum in the US economy will accelerate in the months to come.
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