Smoother Road Ahead for Economy

Practical Economics

Smoother Road Ahead for Economy

As the economy travels along still-icy roads, there are growing signs that the pace is about to pick up.

Traction. That’s been a much-desired quality for many drivers this snowy winter from Montana to Texas and Missouri to Maine, and several states in between. It’s also a goal for the U.S. economy, and one that seems to be finally at hand.

See our slide show: 10 Signs the Economy Is on the Upswing

In terms of consumer spending -- about 70% of U.S. economic activity -- the wheels have been spinning since the Great Recession ended in June 2009. What kept the car from sliding downhill were the stimulus from the federal government, rock-bottom interest rates courtesy of the Federal Reserve and a variety of tax cuts, which stimulated business spending. Business purchases of equipment and software provided nearly half of GDP growth last year.

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That hasn’t been nearly enough. The Great Recession saw GDP shrink by 5%. In real terms, it took from June 2009 until last quarter just to recover. Now indicators support a forecast of 3.5% GDP growth this year, up from 2.9% posted during 2010. Notably, traction -- in the form of consumer spending -- finally seems a reality.

One signal: Consumer confidence is up. As measured monthly by the Conference Board, this index is now above 60 for only the second time since it plunged from a prerecession plateau of over 100 to a recession low of 25.


And consumers are dipping into their wallets more. Compared with a year earlier, January sales were up and car dealers saw more traffic and sales. In fact, consumer spending surged in the fourth quarter last year -- up 4.4%. That pace won’t be sustained, but a gain of about 3% this year is likely, following an increase of 1.8% in 2010 and a minus 1.2% in 2009. It’s about time. As Ethan Harris, an economist with Bank of America Merrill Lynch, points out, the combination of massive monetary and fiscal stimulus is energizing the economy. "But like caffeine, (the impact) doesn’t last forever."

As consumers spend more, and exports continue to increase, businesses are seeing more orders. Excluding defense and civilian aircraft -- thus yielding a truer picture of the basic economy -- there have been gains in durable goods orders in four of the past five months. In January, a survey of purchasing managers in manufacturing indicated that activity -- orders, hiring and so on -- was at a seven-year high. The survey of purchasing managers in service industries indicated the strongest showing since 2006.

All of that is fueling more optimism. Even among home builders -- one of the hardest hit industries -- sentiment has hit bottom. Moreover, the stock market, anticipating additional gains in corporate profits, has seen the Standard & Poor’s 500 index nearly double in the past two years, and it’s heading higher.

Though improvements have been slow to translate into creation of jobs, there are some positive signals there, too. Manufacturers began adding to their payrolls in 2010 for the first time in a decade. And initial filings for unemployment insurance payments have been trending down for months now.


Certainly, not all signals are green. The housing industry continues to sag, lousy news for the 2 million construction workers who lost their jobs over the past three years and a constraint for home appliance, carpeting, furniture and other housing-related industries. Budget cuts by state and local governments will subtract from gains made in other sectors.

As Fed Chairman Ben Bernanke said earlier this month, "The economy, though it appears to be growing, is still in a deep hole." It’s no economic autobahn we’re on. But it sure beats the gridlock of the past few years.