Data released by the government this week indicates the economy has started performing and the ghost of the subprime crisis has been (allegedly) buried at last. The confidence in the economy has been reinforced to some degree by Fed Chairman Ben Bernanke’s refusal to initiate another round of quantitative easing (QE3). Is the economy on a true recovery path? Can we look forward to a better year in 2012 with a healthy GDP expansion as economic indicators continue to show resilience?
If Wall Street Journal Reporter Ben Casselman is to be believed, the recovery has started. The initial jobless claim is trending downwards for several weeks now and currently stands at 8.3 percent. Developments in the jobs market will continue to indicate an economic recovery. The jobless claims and the number of jobs added, though correlated, sometimes tend to travel in opposite directions. While the jobless claims number tells us if people are losing jobs, they don’t tell us if new jobs are being created.
Sometime last year we had witnessed new jobs being created, but the jobless claims never really came down. So it was not clear if people were simply leaving the job market rather than finding new jobs. The difference this time is that job growth appears to have been consistent according to reports and some 900,000 new jobs have been added in the last five months. Though this number is not definitive, it still indicates that the job market is getting healthier.
For retail investors, one of the additional indicators of a recovery would be the ISM Manufacturing PMI number released on Thursday, March 1. Though it fell short of expectations, it still ended up above 50, indicating an expansion in manufacturing activities.
On previous occasions, the economy made progress only to retreat later, unable to withstand negative shocks. This time however, despite higher oil and gas prices, automobile sales came out strong. Consumer confidence has been higher and retail sales came in steady, indicating this time around the economy has survived the shock, at least for the time being.
There remain some pitfalls to recovery though; a sudden spike in oil prices may derail the growth momentum just as a contagion in Europe may reverse the recovery process. A few fiscal shocks are also looming on the horizon such as the US government raising taxes and cutting expenditures further.
The US Fed continues to be worried about the pace of consumer income and spending rise, as indicated by Bernanke on Thursday. The silver lining is that savings have been higher than initially estimated, suggesting that consumers have some base to build on from here. I can only be cautiously optimistic, as possibilities of a fresh headwind in the future remain.
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