Springtime View

Written by Jeff Thredgold, President, Thredgold Economic Associates

March 13, 2012

The American Economy
The “good” news?  The U.S. economy has now been in growth mode for 33 months…ever since the Great Recession ending in June 2009.  The “bad” news?  U.S. economic growth has averaged a 2.4% real (inflation adjusted) annual growth pace since the expansion began, the weakest economic expansion since the 1940s.

U.S. real growth of 3.0% during 2010 gave way to a very modest 1.7% real growth pace in 2011. Most forecasters see real growth this year near 2.4%. 

The long-in-place economic headwinds of weak American home values; anxiety about European financial strife getting worse; fear of Iran’s nuclear ambitions leading to a Middle Eastern conflict, with even higher oil prices; and consumer anxiety about the size, growth and direction of the U.S. government, leading to four years of $1.3 trillion annual budget deficits, with trillion dollar annual budget deficits for as far as the eye can see…limit American economic growth opportunities.

2012 Elections
Just think!...less than eight months to Election Day! 

Sooner rather than later, the Republicans will likely settle on a candidate, with hope (in some circles) that a contentious convention can be avoided.  At that time, the focus will hopefully shift to more critical issues facing the American people such as the size and growth of the U.S. government, health care, war, and the rising amount of government intervention in our lives that needs to be curtailed.  Discussing critical issues!...what a concept!  

U.S. Employment
The U.S. economy’s net addition of 227,000 jobs during February 2012 was one more sign of an American job creation machine finally shifting into a higher gear.  The 227,000 net job gain slightly exceeded forecasting economists’ view of a 210,000 job rise. 

In addition, estimated job gains of the two prior months were revised higher by 61,000 jobs.  February’s rise capped the best six-month streak of job growth since 2006 (bloomberg.com).

As expected, the nation’s unemployment rate remained at 8.3% in February, a three-year low.  The nation’s unemployment, or jobless rate, is derived from a survey of households that is different from the “official” job creation survey data.  The estimated 428,000 rise in employment as measured in the household survey was largely matched by the estimated 476,000 rise in the nation’s civilian labor force. 

We have long suggested that if and when U.S. employment gains were stronger, hundreds of thousands of people who had formerly left the labor force as discouraged workers would return to seek more readily available jobs.  Such was the case in February.  We expect more of the same in coming months, leading to no major downward move in the nation’s jobless rate prior to year-end.

More than 1.2 million net new jobs have been added in the U.S. economy over the past six months, with a gain of nearly 3.4 million net new jobs since the end of 2009.  However, such gains represent only 40% of the 8.5 million net jobs lost during the Great Recession, which ran from December 2007 to June 2009.

U.S. Inflation
Consumer prices rose 3.0% during 2011, with consensus expectations that such prices will rise near 2.2% this year.  One key will obviously be oil prices, which have been pushed higher in recent months by worst case fears about a closure of the Strait of Hormuz by the Iranians or an Israeli or U.S. (or both) attack upon Iranian nuclear installations. 

Apart from oil, enough slack remains in U.S. and global labor markets to largely keep inflation pressures in check.  Note that some prominent Wall Street-types are more fearful of deflation than inflation in coming years.

The Federal Reserve
Fed Chair Ben Bernanke has taken all the fun out of being a Fed-watcher.  The “old days” of trying to decipher every work, every nuance of Fed commentary or eyebrow twitching has now given way to the most recent Fed statement that the most important interest rate…the federal funds rate…will remain at an all-time low target range of 0.00%-0.25% until late 2014.  The rate has already been at such a level since December 2008…

…“boring!”

Housing and Mortgage Rates
The painful fall of more than one-third in average U.S home values during the past five years could end later this year.  Note:  economists said the same thing in 2010 and 2011.

Sustained, if not impressive U.S. economic growth, rising employment, and our collective sigh of relief of having dodged any major new bullets during the past three years suggests that housing values are attractive.  Foreign buyers are busy buying U.S. properties…seeing great values.  Thirty-year fixed-rate mortgages for conventional loans are now in the “high 3s”…a level not seen in 60 years. 

The Global Economy
Europe and China dominate the headlines…now there’s a change!  The Greeks finally obtained massive write downs by major debt holders, in some arenas triggering “default” language.  One can be certain that the Irish and the Portuguese will expect similar write downs when their time in the sun returns.  Anxiety about much larger Spain and Italy continues to smolder just under the radar.

Chinese leadership is trying to slow that dizzying economy down, with an eye to keeping inflation pressures and real estate bubbles under control.  Indian growth has slowed as well.  As usual, the Japanese economy is not doing much of anything.  While frequently overshadowed by China, India, and Japan, the combined economic output of South Korea, Singapore, Thailand, Vietnam, Indonesia, Malaysia and other Asian nations equals that of China.

Latin America has slowed somewhat, with Brazil growing at a much more modest pace than the highflying growth of recent years.  Brazil recently surpassed the United Kingdom to be considered the global community’s sixth largest economy.

Mexico quietly strengthens its economy, while drug cartel violence is all we ever hear about.  Canadian growth has slowed somewhat, with the disparity between the energy-rich West…and the East dealing with the painful impact of a strong Canadian dollar on manufacturing exports and tourism.  Meanwhile, Canadians are more than happy to buy real estate properties in warmer U.S. locations (think Arizona) at bargain-basement prices.

Could be better…Could be worse.  Such is life in the big city