Economic developments lead to cautious optimism
Looking into the future is always fraught with danger given the multitude of known influences that need to be considered, not to mention those factors that are unknown at the time a forecast is produced. For example, how could anyone have guessed that a Japanese tsunami would roil markets last year or that an uncommonly mild winter would prevail in the U.S. this year while many parts of Europe dig out from under record snowfalls?
As matters currently stand, it seems as though the U.S. economy is plodding along on a favorable growth path; one that is almost certainly substandard, but probably one that is allowing a partial healing of our nation’s labor markets. Generally in 2012, the number of initial claims for unemployment insurance has been on the decline, with the weekly figures tracking well below the critical threshold of 400,000 new claimants. While much — perhaps too much — has been made about how numbers below 400,000 mean that job creation has accelerated, it is undeniably good news that the number of newly unemployed individuals is falling.
To be sure, one factor that may be distorting the strength of some labor market data is the very mild winter and the influence this could have on the “seasonal adjustment” process. In most years, as the weather turns nasty in January and February, the number of initial claims rises and many jobs are lost, such as in the construction, transportation, and retail sectors. But since such influences occur virtually every year, the government can extract seasonal influences through the seasonal adjustment process by knocking down the initial claims numbers (and bumping up the employment figures) so as to adjust data that more fully reflect the underlying trends without the impact of seasonal influences.
During 2012, however, the mild weather likely means fewer initial claims for unemployment insurance and more jobs available than is typical. If this scenario seems reasonable — keeping in mind the warning above about the nature of economic forecasting — then the figures for January and February may be misleadingly strong. Of course, if this happens, statistical payback may take place in March and April. After all, you can’t gain back what you never lost due to mild weather, thus the jobs normally created in spring due to seasonal influences are absent and make the “seasonally adjusted” data for those months appear uncomfortably weak. When averaged together, however, these first four months or so of 2012 will likely show decent jobs growth, amounting to some 1.75–2.0 million new jobs for the year. To determine if this belief has some validity to it, Friday will see the release of the February labor market reports, which should be reasonably strong, with approximately 200,000 payroll jobs created and the unemployment rate changing little from January (8.3 percent).
Despite this generally good labor market news, there are certainly some reasons for concern, and thus only “cautious” optimism about economic developments. Last week, for example, January data for personal income and spending of Americans were released and the results were not encouraging. While personal income rose by a respectable 0.3 percent compared to December, after adjusting for taxes and inflation, disposable income fell by 0.1 percent. And for the third month in a row, the inflation-adjusted spending of U.S. consumers was flat, suggesting growth in the first quarter will be below the 3.0 percent growth pace set during the final three months of 2011.
Lower economic growth is also present in a number of other countries, most notably in Europe and China. In the case of Europe, the 17 nation euro-zone saw its collective GDP fall by 0.3 percent in the fourth quarter of last year compared to the prior quarter. While it is far from certain, this could well indicate that the euro-zone has fallen into recession, which will likely reduce their purchase of U.S. goods and services and slow our own economy as the year progresses.
As well the Chinese government has just reduced the estimate of their own economic growth anticipated in 2012 to “only” 7.5 percent. While this may well remain the best growth rate in the world, it is a significant slowdown from growth rates of 10 percent plus for the past several years. And as with Europe, the Chinese slowdown will place some limits on just how much U.S. exports can expand (say, in the agricultural sector) and allow our economy to prosper.
Or so the tea leaves presently suggest.
Dr. James Newton serves as chief economic advisor to Commerce National Bank and is an auxiliary faculty member in economics and statistics at OSU-Marion and OSU-Newark. Dr. Newton’s views do not necessarily reflect those of Commerce National Bank or OSU-Marion/Newark.