Monday, March 18, 2013

U.S. Economy Improving ... This Week's Economic Indicators Should Confrim That

All the financial news this morning will be about Cyprus, but that issue won't stay on the front burner for long. Its finances are in shambles, and its government is seeking ways to get the European community to extend it bailout funds without causing a panic by individual savers and worldwide investors.

The problem is simply that Cyprus, like many other nations, has far too much debt in relation to the size of its economy and its prospects for growth, and has run out of borrowing capacity. Its creditors have had enough.

The lesson is a simple one. Don't get too far down the road of financial catastrophe or you'll be out of luck when the creditors and potential lenders cut off the borrowed funds. Let's hope our government knows best gang of 'happy talkers' is listening, because even though Cyprus is a small country, it has big lessons to teach us about fiscal responsibility and solvency.

In the U.S. we're looking for continued economic recovery to be confirmed in this week's reports. Then if the politicians can come to grips with the fact that we need to get our financial act together as a nation, including entitlements, we should be on a steady course toward a stable and prosperous future. So let's look briefly at what we can expect to see in this week's economic reports.

Housing up, Layoffs down: Economy better? is subtitled 'Growth in early 2013 picks up, but staying power in question:

"Home sales and construction are on the rise. U.S. manufacturers are perking up a bit after a lull. And layoffs as measured by a weekly unemployment report are on the wane.

Things seem to looking up again — knock on wood — for the economy 3½ years into a agonizingly slow recovery. And a slate of reports this week on housing, heavy industry and the labor market could offer further evidence that growth is on the upswing.

Economists polled by MarketWatch project growth will rise to 2.3% in the first quarter from a miserly 0.1% in the last three months of 2012.

The first-quarter uptick, however, won’t be strong enough to persuade the Federal Reserve to unwind its massive bond-buying program aimed at lowering interest rates to boost the economy. The Fed is not expected to alter its strategy when top policy makers meet this week in Washington.

MarketWatch consensus
date report Consensus previous
March 18 Home builder's index 47 46
March 19 Housing starts 915,000 890,000
March 21 Weekly jobless claims 340,000 332,000
March 21 Existing home sales 5.03 mln 4.92 mln
March 21 Leading indicators 0.3% 0.2%
March 21 Philly Fed 0.0 -12.5

That’s because the staying power of the latest staccato burst of growth is still uncertain. The economy roared out of the gate at the start of both 2011 and 2012, only to slow to a crawl by midyear. It will take more positive signs of expansion, especially business investment and hiring, to ease worries about another midyear dip. . . .

One area of the economy likely to keep chugging along is housing. Home construction surged 28% last year after meager increases of 4% in 2011 and 6% in 2010. The industry finally appears primed for a long-term rebound six years after a bubble popped and triggered the worst housing downturn in the modern era.

In February, housing starts are forecast to rise slightly to an annual rate of 913,000 from 890,000 in the prior month. And permits to start new construction probably rose a touch faster. The report will be released Tuesday morning.

The Fed takes center stage on Wednesday afternoon. The Federal Open Market Committee, the body that sets interest rates, is widely expected to leave its bond-buying program in place. The main reason is the slow recovery in the pace of hiring.

Certainly the 236,000 increase in new jobs in February was encouraging to the Fed. And so is an acceleration in job growth to more than 200,000 a month in the past four months, Yet the unemployment rate remains stubbornly high at 7.7% and much of the improvement in the labor market has come more from a slower pace of layoffs than an actual surge in new jobs created.

“February’s solid payroll gain is unlikely to persuade Fed officials that the trend in employment is accelerating,” Citibank economists wrote in a report, taking note of other surveys that indicate companies are still cautious about hiring.

Consider the most recent Labor Department report, known as JOLTS, that tracks job openings and layoffs. Chief economist Scott Anderson of Bank of the West points out that layoffs were down 8.1% in January compared with one year earlier, but hiring was only up 1.3%.

The CEB’s Griffin suggests that trend could persist. The firm’s latest survey of executives about their plans to hire found little reason to believe companies will start to boost payrolls soon. Almost as many companies say they plan to reduce head count in 2013 as to increase employment. And some expressed the first hints of concern about rising labor costs after years of little wage pressure.

Still, the caution was a surprise to Griffin because companies are more optimistic they can boost production and sales in 2013. “We see slow marginal improvement in hiring, but the outlook isn’t particularly strong,” he said.

Until the monthly employment numbers show otherwise, then, the decline in weekly jobless claims in early 2013 cannot be taken as clear evidence that a dramatic upturn in job creation is under way. Initial claims have fallen gradually since last fall to a five-year low, but the weekly report tells us more about the pace of layoffs than the speed of hiring."

Summing Up

Housing and job creation are the things to watch.

The Fed will keep interest rates low for a long time to come, and business conditions will continue to show gradual improvement.

Housing has a deep hole from which to climb but should continue to exhibit steady improvement in the months ahead.

That leaves jobs. And there is where we're stuck in the mud.

Hopefully, the government knows best gang won't do anything to make people even more concerned and less confident about the future.

Because with higher confidence will come higher levels of consumer spending and greater business investment. And both are absolutely essential to creating the number of new jobs that will be needed to put Americans back to work.

That's my take.

Thanks. Bob.

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