Fourth quarter performance of the U.S. economy was revised slightly higher Wednesday, with one more revision to come in a month. Then, in coming years, the U.S. Commerce Department will revise the data anytime they want to — but I digress.
The American economy grew at a 3 percent real (after inflation) annual rate during the October-December 2011 quarter, up slightly from the 2.8 percent rate initially reported. Ironically, 3 percent was the consensus forecast when the data first came out in late January — you just can’t win
The Best of ‘11
The 3 percent growth pace during 2011’s final quarter was the best of the year, following real annual growth rates of 0.4 percent, 1.3 percent, and 1.8 percent in the three prior quarters of 2011. The 3 percent fourth quarter growth pace was also the best since 2010’s second quarter. Still, the economy’s real growth pace of 1.7 percent during 2011 badly trailed the 3 percent real growth pace of 2010.
Growth in the current quarter is likely to weaken, with most forecasts around a 1.8 to 2.4 percent real annual rate. Second quarter performance looks a bit better at this time.
In addition, the U.S. economy has averaged a 2.4 percent real annual growth pace since the current economic expansion officially began in July 2009. Such growth ranks as the weakest economic rebound from recession since the 1940s — ouch!
It seems the “headwinds” of No. 1, weak housing markets across the country, with home values down roughly 35 percent since their 2006 peak; No.2, still high unemployment (by two measures, much higher than the currently reported official 8.3 percent rate); and No. 3, enormous anxiety about the size, growth, and direction of the U.S. government (think $1.3 trillion annual budget deficits for four years now) have lessened corporate interest in expansion and new hiring, as well as pooh-poohed consumer interest in more aggressive spending.
Yes, the economy added more than 400,000 net new jobs during the past two months — only 5.5 million more net new jobs to go and we will be back to “square one” of 2007.
The What Ifs
A couple of reasons can be noted as to why the U.S. economy keeps growing, even if at a modest clip. First, two full years of never-ending discussion and media attention about sovereign (national) debt stresses in Greece, Ireland, Portugal, Spain, Italy, etc. have yet to see those nations’ slide into the Atlantic or the Mediterranean. The Europeans have simply become the world’s best participants at kicking the can down the road. Second, a lot of discussion last summer about impending U.S. recession in 2012 (never our view or the consensus view) finally fell by the wayside.
Yes, threats to U.S. economic growth remain. Iran’s nuclear ambitions and the likely Israeli or U.S. (or other) military response could upset the apple cart. Oil prices could jump much higher. European issues could become much more daunting.
At this juncture, however, the stock market is telling us that things have modestly improved. That is usually as good an indicator as we get.
A key measure of how consumers feel about the economy and their prospects within it jumped nicely in February. The Conference Board reported that its Consumer Confidence Index jumped from a revised 61.5 in January to a greater-than-forecast 70.8 in February.
Most forecasters predicted the Index would rise to around 63, again showing you what we economists know. The 70.8 February measure was the highest since it reached 72 last February.
As one might expect, the rising availability of jobs in recent months contributed to the gain. At the same time, the impact of energy prices had, and will have, a material impact — both negative and positive.
Yes, oil prices are above $100 per barrel. Gasoline prices have jumped roughly 35 cents per gallon during the past year, with much of the rise during the past month.
At the same time, however, two other energy developments have helped consumer pocketbooks. Natural gas prices are down 40 percent from a year ago. In addition, warm weather across much of the nation this winter has led to less demand for natural gas, saving consumers money in two ways.
The Index has both a near-term and a six-months-out component, with both rising during February. The Present Situation Index rose to 45 in February from 38.8 the prior month. The Expectations Index rose sharply to 88 in February versus 76.7 in January.
The “major number” for either measure tends to be around 90, a level that typically suggests stronger economic growth. The index has been above 100 at times, while also at a painful low of 25.3 in February 2009.
The “Recession of Confidence”
When traveling and speaking a great deal around North America in many diverse industries, I have noted to audiences that the U.S. economy has officially been in growth mode for 32 months, following the Great Recession which ran from December 2007 to June 2009. When suggesting the 32 months of economic growth, it has been worthwhile to note that we have recorded such growth statistically, if not necessarily emotionally.
I have also talked of the “recession of confidence” that has engulfed the economy, tied to housing weakness, high unemployment, and downright fear in many circles of the size, growth, and direction of the U.S. Government. Unbelievable $1 trillion plus annual deficits of recent years, with similar deficits for as far as the eye can see, hasn’t exactly inspired confidence either.
The recession of confidence appears to be fading, for reasons noted earlier in the GDP discussion. Also as noted earlier, major risks remain firmly in place.
The long-term correlation between consumer confidence levels and consumer spending has not always been as tight as one might expect. However, how consumers feel about their current situation and their expectations for what they will face down the road are important. After all, American consumers account for 70 percent of every dollar spent in the U.S. economy.
Jeff is the only economist in the world to have earned the CSP (Certified Speaking Professional) international designation, the highest earned designation in professional speaking. He is also economic consultant to Zions Bank.
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