The Struggle Between Growth and Contraction Rolls On

The year is coming to a close, which inspires looking at recent history for some perspective on the year ahead. The past is hardly a flawless window into the future, but it’s a good place to start for considering the possibilities for 2011. The following charts, courtesy of the economics database at the St. Louis Fed, summarize some of the key macro trends over the past year.

The basic message in the graphs below: the economy is on the mend, but it’s a precarious rebound. The main challenges: job growth is still tepid and the housing market continues to suffer. Elsewhere, the economy is showing signs of improvement. But the struggle between growth and contraction rolls on. The forces of expansion have the upper hand these days, but only marginally so. More of the same is expected for 2011.

The broadest measure of U.S. economic activity is real (inflation adjusted), seasonally adjusted annualized gross domestic product (GDP). The latest estimate runs through this year’s third quarter and pegs GDP at $13.3 trillion, or 3.2% higher than the year-earlier total. That’s just below the all-time high of $13.4 trillion reached in 2008’s second quarter. Given what we know about the recent uptick in economic activity in recent months, the odds look modestly favorable for expecting GDP to reach a new high in 2011.

A new high in GDP would be welcome news, but it will ring hollow until job growth picks up. For the moment, the labor market recovery remains weak, but at least there’s a recovery to speak of. The manufacturing sector was hit hardest during the Great Recession (red line in chart below), but its 0.8% year-over-year rise as of last month is now in line with the annual rate of increase for job growth in the services sector (+0.7%, green line) and private sector employment overall (+1.0%, blue line), as of November 2010.

Weekly hours worked and average hourly earnings
The aggregate weekly hours worked index has rebounded sharply over the past year. The annual pace has recently jumped to a 2%-plus rate (red line in chart below). That’s roughly in line with the annual change in average hourly earnings (blue line), although it’s clear that the pace of wage growth continues to trend down, offering another reminder that the forces of disinflation are taking a toll in some corners.

Unemployment rate
Meantime, there’s still no sign of improvement in the jobless rate, which remains elevated despite the formal end of the recession in June 2009.

Industrial production and commercial & industrial loans
Industrial production has rebounded sharply (red line in chart below), although the pace of commercial lending is still contracting (blue line), albeit at a lesser rate these days. Banks are still reluctant to lend, which only creates another headwind for growth.

Monetary policy
The annual rate of change in various measures of the nation’s money stock turned higher recently (again), thanks to the Federal Reserve’s renewed focus on monetary stimulus.

Spending & Income
Real personal consumption expenditures (red line in chart below) and disposable personal income (blue line) have rebounded too. Both are now rising at an annual pace of well over 2%, as of last month.

But the housing market remains weak. New housing starts (blue line in chart below) and new single-family home sold (red line) remain depressed.

Housing prices
No wonder that housing prices have trended down.

Consumer Sentiment
Unsurprisingly, consumers are still wary.

About James Picerno 894 Articles

James Picerno is a financial journalist who has been writing about finance and investment theory for more than twenty years. He writes for trade magazines read by financial professionals and financial advisers.

Over the years, he’s written for the Wall Street Journal, Barron’s, Bloomberg, Dow Jones, Reuters.

Visit: The Capital Spectator

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