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So, yes, we’ve got an economic recovery, but how strong is still an open question

posted on April 5, 2010 at 10:30 am
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economic recovery

Not so fast, okay?

Friday’s news that the U.S. economy added 162,000 jobs in March was indeed good news. I think it does mean that an economic recovery is indeed underway.

But that’s always been just one of the three big questions about the economy as it recovers from the Great Recession.

And two of those questions remain unanswered. And since the answers hang on the U.S. consumer, they’re likely to stay unanswered for months yet.

We do, however, have a clearer picture now than, say, six months ago, of what consumer behavior to look for in order to answer those questions.

In the hours after—and in one case before—the Department of Labor announced that the economy had added 162,000 jobs in March, economists such as those at the National Bureau of Economic Research conceded that the economy had probably moved out of recession. Economists who work for the Obama administration, such as Larry Summers, senior economic advisor to the President, were understandably more optimistic. Speaking in London before the numbers were released, Summers said “I think the economy appears to be moving towards escape velocity.”

The recession does indeed appear to be over. Question One answered.

But we still don’t know how fast the economy will grow in the recovery (Question Two.)  Or if the economy will steadily accelerate from the bottom or go into a stall (and grow at a significantly lower rate) sometime in the next quarter or three (Question Three.)

The debt-laden, cash-strapped, and deeply worried U.S. consumer holds the answer to those two questions. So far what we’ve seen in the jobs numbers, in the durable orders, in the ISM purchasing managers survey is evidence that the manufacturing sector of the U.S. economy is going strong. But that sector is relatively small—consumer spending makes up 60%-70% of U.S. economic activity—and it can’t keep growing unless consumers start to step up and buy what manufacturers are producing.

Recent government numbers suggest that consumer spending will grow by 3% in the first quarter of 2010. That would be a big improvement from the 1.6% increase in consumer spending in the fourth quarter of 2009.

But as impressive as that increase is, it’s not enough. Economists estimate that to drive the recovery so that the economy approaches its speed limit will require an increase in consumer spending of 4%. Anything less and the economy could keep on growing but at an anemic rate.

And it’s by no means certain if consumers will be able to keep up even that 3% level of spending increase—remember the full unemployment rate, the one that includes discouraged and part-time workers looking for full time work, stands near 17%. And it actually rose in March.

Some economists say we could see the rate of increase in consumer spending drop back near 2% in the second half of the year. That would be enough to keep the economy growing—so no double dip recession—but not enough to reduce unemployment at all quickly.

 A recovery like that would feel like no recovery at all to millions of families.

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  • ntack5 on 5 April 2010

    Either way, isn’t it still a positive for the market? if the economy grows faster than expected, then the market will rally. If the economy grows as expected, and unemployment stays higher than what Obama would need for re-election, then the Feds will keep the $ pipeline open and rates ‘relatively’ low.

  • EdMcGon on 5 April 2010

    The wild card in this mess is the Fed. Should they raise rates and risk killing a weakly growing economy? Or do they keep the rates low and risk inflation? My money is on the latter solution, since the first solution would leave them directly responsible for killing the economy.

  • trying 2 learn on 5 April 2010


    At this juncture what would benefit the most people – lower inflation or economic growth!

  • robert1234 on 5 April 2010

    Does it really matter if the economy is growing or not… just put your money in the bull market, and let it ride !

  • viwi on 5 April 2010

    robert1234: “buy high and try to sell even higher”? I never though it was a good idea. Right now market is rather optimistic, so, in my opinion, it is a good time to sell. I will wait for bad news to buy. They will come sooner or later.

    Jim, nice report. I am kind of skeptical about the whole recovery. In my opinion, we got oversold on the idea that things were really really bad last year. In reality, it was not that bad, but it was “pretty bad”. What worries me is that I do not see a clear wave of “new and exciting” development, such as computers, internet, etc., which drove all the previous recoveries. There was some small talk about “green energy”, but all of a sudden it all disappeared, and we again in a drilling mood. I also noticed that oil prices are going up (bad for business) and euro is going down (bad for export). Now, I will pause and ask a really naive question: how can the US economy maintain its momentum in such environment???

  • ruters78 on 5 April 2010


    In a strangely counterintuitive way of thinking better jobs numbers would indicate a stronger than expected economy. The would elevate concerns in traders minds that rates would go up sooner rather than expected and could lead to a selloff in equities. So it’s not necessarily a good thing (for equities).


    While I like your optimism, it’s an increasing amount of comments like these that makes me think we’re getting a little ahead of ourselves. Just when everyone thinks there’s nowhere to go but up, the market usually goes down.

  • YX on 5 April 2010

    I am very skeptical about the job report, because just a day or so before the Labor Dept.’s report, ADP reported net job loss by private sector if I remember correctly. Two questions here. (1) Do you trust ADP or the current Labor Dept.? (2) Regardless which one you trust, it seems that the governmental jobs made a difference here. Governmental jobs do not create wealth but suck in. That further hurts the job creation down the road.

    10 year note hit 4%. Did you all heard last week that some big gulus (including Bill Gross) saying bond’s bull run is over!

  • viwi on 5 April 2010

    This year is a big year for the US government jobs (think census) . 1 mln jobs. They (WH) will have some good numbers to report before the upcoming elections; however, all this temporal success will be gone next year, and there is no real sign that the economy is improving (at least I do not see businesses hiring like crazy).

  • dozier99 on 5 April 2010

    I’m nervous about all of the positive sentiment as well. I just put in some trailing stop orders today after learning a hard lesson in January.

  • Domino412 on 5 April 2010

    I too , am skeptical about the fast and furious run-up with the markets. I don’t feel comfortable at all putting more cash to work here. We are terribly overdue for at least a little pull-back. The more we run up like this the more that”rubber band” effect that Jim talked about during the down cycle last year will certainly snap us down hard and fast just when no ones looking. Then, my quess is we’ll troll along sideways for months on end trapping all those that got in at the top. Just a projection on my part, who knows?

  • Run26.2 on 5 April 2010

    An interesting graph… Anatomy of a Crash 2009 vs 1907… could a drop be ahead?


  • salmoned on 5 April 2010

    Both ‘earnings pop’ and ‘slow growth, no double dip’ scenarios will be good for the market. The first boosts the market by late-to-the-party investors, the second boosts the market by removing the doubts about a double-dip (clarifying the future). I’d be happy with either.

  • ogowan on 5 April 2010

    Cheer for the market or economy? I prefer good things for the economy. Jobs are good long term.I prefer to not focus on the market short term.

  • EdMcGon on 6 April 2010

    trying 2 learn,
    Ideally, what you want is low inflation (about 1-2%) with steady but low economic growth (about 3%). Too much inflation will kill economic growth, whereas too much economic growth and you’ll get high inflation (which will in turn hurt your economic growth).

    In the immortal words of the old Clinton campaign slogan, “It’s the economy, stupid!” (that’s the slogan. I’m not calling anyone stupid). It all comes back to the economy. A little inflation can stimulate the economy, too much will kill it. At the same time, you don’t want the economy getting overheated. It’s a fine balancing act which our “powers that be” are attempting.

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