Below is my commentary for the Monday Economic Report.
The U.S. economy picked up some steam in the past couple of months, with several economic reports showing increased business activity and cautious optimism. Even with that positive trend, the Bureau of Labor Statistics surprised many economists with robust employment growth in January. Manufacturers added 82,000 net new jobs in the past two months, and the unemployment rate fell to 8.3 percent – a level not seen since February 2009.
Much of this recent manufacturing growth occurred in the durable goods sector. The Census Bureau reported a 1.1 percent increase in new orders for manufactured goods in December, which was led by sizable increases from the machinery, metals and transportation sectors. These areas also had the largest employment gains in January. Broadly speaking, though, the gains experienced lately have not been limited to just durables. The Institute for Supply Management’s purchasing managers’ index found that the sector as a whole continues to expand, with new orders growing stronger from the previous month. The Dallas Federal Reserve Bank’s survey had a similar finding.
Of course, businesses and consumers remain cautious in their optimism. Even with an improved economy, weaknesses remain, and the public’s perception of the current environment can often shift with the latest information. As evidence of this, the Conference Board’s measure of consumer confidence dipped in January, mostly on a dampened mood about the current economic climate. The Conference Board cited higher gasoline prices as one explanation, but it was also clear that respondents were more worried about pocketbook issues than in the month before. Perhaps these thoughts crept into their spending habits, as well, with the government reporting personal spending unchanged in December. Even with higher personal income for the month, consumers opted to control their purchases. (We saw this in an earlier report, as well, suggesting that holiday spending was more lackluster than originally hyped.)
While much has been made of the fiscal challenges in Europe, the Congressional Budget Office (CBO) last week brought the domestic deficit problems back into focus with the release of its latest budget outlook through fiscal year 2022. Its baseline budget for FY 2012 is for a deficit of $1.08 trillion, with total deficits exceeding $3 trillion over the next 10 years. Under an alternate fiscal scenario, these deficits could add to nearly $11 trillion through FY 2022. In looking at this in-depth report, it is clear that budgetary discussions will need to focus on both discretionary and mandatory spending in the years ahead. For instance, defense spending is expected to fall from 4.7 percent of GDP to 3.0 percent in that time frame; meanwhile, entitlement spending (not including interest on the debt) will grow from $2 trillion to $3.5 trillion. Overall, CBO’s baseline analysis paints a picture in which economic growth will be modest at best and the nation’s fiscal budgetary challenges will only become more serious with time.
This week will be slower on the data front. The biggest number will come on Friday, with the release of new export data from the Census Bureau. Given the importance of trade to many manufacturers’ growth plans, we will look for an improvement in manufactured goods exports from the decline in November. In addition to international trade, we will also learn about labor turnover rates, new consumer sentiment data from the University of Michigan and wholesale trade information.
Chad Moutray is Chief Economist, National Association of Manufacturers.