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News : US Economy Last Updated: Mar 23, 2011 - 6:05 AM


US economic growth hits rocky patch but indicators point to strong employment growth
By Michael Hennigan, Founder and Editor of Finfacts
Mar 22, 2011 - 4:30 AM

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From Standard & Poor's report on the US economy, US Risks To The Forecast: Oil We Have To Fear Is... (pdf): This recession has been the longest and deepest since the 1946 downturn. The jobs markets indicate that the private sector is hiring again. Private payrolls were up an average 140,000 in the last six months, and the unemployment rate has dipped below 9% for the first time in two years. The baseline forecast is for the unemployment rate to slide only slowly from its current level of 8.9%.

The S&P 500 Index of stock prices dropped 57% from October 2007 to March 2009, the largest drop in postwar history. The S&P 500 is now up 92% from its low.

US economic growth has recently hit a rocky patch while the optimism of late 2010 has been buffeted by the oil price spike linked to turmoil in the Middle East, resurgent food price inflation and the fallout from the earthquake in Japan. However, indicators point to strong employment growth according to one economic report.

On Monday, the Chicago Fed National Activity Index (CFNAI) - - a monthly index designed to gauge overall economic activity and related inflationary pressure - - showed a dip to –0.04 in February from –0.01 in January. Three of the four broad categories of indicators that make up the index made positive contributions in February, but for the second consecutive month they were offset by continued weakness in the consumption and housing category.

Also on Monday, the National Association of Realtors reported that existing-home sales, which are completed transactions that include single-family, townhomes, condominiums and co-ops, dropped 9.6% to a seasonally adjusted annual rate of 4.88m in February from an upwardly revised 5.40m in January, and are 2.8% below the 5.02m pace in February 2010.

Distressed/bank sales accounted for 39% of the total.

Last week, a measure of future US economic growth was reported to have fallen in the latest week, but the index's growth rate rose to a 43-week high, a research group said.

The Economic Cycle Research Institute, said its Weekly Leading Index fell to 130.4 in the week ended March 11 from 130.9 in the previous week, originally reported at 130.8.

The index's annualized growth rate rose to 7.1% from 6.8% a week earlier. That was the highest since May 14, 2010, when it was 9.4%.

Also last week, David Greenlaw, a Morgan Stanley managing director and economist, said their tracking estimate of 1Q GDP (gross domestic product), which is updated following release of every relevant indicator, has drifted steadily lower over the course of the past six weeks. Specifically, since January 28 (when 4Q GDP was released), the tracking estimate for 1Q has slipped from +4.5% to +2.9%. He says the deterioration has been fairly steady along the way, but the biggest contributors were the foreign trade reports released on February 11 and March 11, along with the February 15 retail sales report.

Greenlaw says much of the deterioration in 1Q GDP has been tied to the impact of unusually severe winter weather in some parts of the country.

He says an improvement in labour market conditions is critical to sustaining above-trend economic growth in the US as the impact of monetary and fiscal stimulus eventually wanes. The good news is that a variety of indicators point to a more sustainable pick-up in employment growth going forward from here. Specifically, there have been a steady string of upward revisions to payrolls; weekly jobless claims have finally sustained a move below 400,000; and the household survey - - which, although quite volatile on a monthly basis, sometimes does a better job than the establishment survey of capturing labor market developments around important turning points - - has shown very rapid employment gains in recent months.

Headwinds include spending retrenchment at state and local levels and housing - - even though  affordability is near a record high.

The economist says tailwinds include strong growth in exports and capital spending.

Standard & Poor's the US ratings agency also updated its US economic outlook last week

The March baseline forecast indicates that recovery from the deepest and longest recession since the Great Depression will remain weak. Turmoil in the Middle East pushed oil prices above $100/barrel, though they're still below their 2008 highs, and S&P expects them to remain stable near that level. Higher oil prices will likely slow, but not derail, the recovery. Financial markets have returned toward normal, and the agency assumes the trend will continue.

S&P says the inability to borrow money has pushed investment down more than expected, and consumers are suffering from both the loss of wealth and loss of jobs. The result will be a sluggish recovery, with the unemployment rate remaining well above full employment levels throughout the forecast period (through 2014).

US Risks To The Forecast: Oil We Have To Fear Is... (pdf)

Discussing the global economy's fight with a number headwinds, with Willem Buiter, Citi chief economist and former professor of economics at the London school of Economics:

How the headlines overseas impact the global economy and whether a recession is looming on the horizon, particularly given rising food and energy prices, with David Rosenberg, former Bof A/Merrill Lynch chief North American economist:

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