After a relatively good showing of 2.5 percent growth in the fourth quarter of last year, the U.S. economy slammed on the brakes in the first three months of 2007. Originally pegged at 1.6 percent growth, the government revised that estimate to just 0.6 percent — barely dodging an outright downturn.
An ongoing slump in the housing market, along with layoffs in construction, real estate, mortgage banking and other related industries, has weighed heavily on the economy. Fearing a further slowdown, businesses cut back sharply on inventories in the first quarter to avoid getting caught with unsold goods. That only made the slowdown worse.
That sums up the current problems nicely. Although consumer spending has been strong, business and residential investment has slowed down, leading some to become very concerned about the coming quarters.
But over the past two months there have been signs that business is picking up again. One of the latest came Thursday from a closely watched index of buying by purchasing managers, which moved higher than expected in May and showed strong growth in manufacturing across a broad range of industries. So the sharp cut in inventories in the first quarter may already be helping the economy get back on its feet again.
Bloomberg has more on this:
A measure of U.S. business activity jumped more than forecast in May, signaling expansion for the third consecutive month and suggesting the economy is accelerating after bottoming in the first quarter.
The National Association of Purchasing Management-Chicago said today its business barometer rose to 61.7 in May from 52.9 the prior month. Readings greater than 50 signal expansion,
Export demand and business investment in new equipment are helping to cushion the drag on the economy from the deepest housing recession in a decade and a half. The report lends support to Federal Reserve Chairman Ben S. Bernanke's forecast that the economy may pick up pace later in the year.
``This is a solid report all around and it represents a clear break from the first two months of the year,'' Scott Anderson, senior economist at Wells Fargo Co. in Minneapolis, who had forecast an index reading of 55. ``It suggests that the inventory correction has run its course.''
Here's a link to the complete report. The overall index is showing an uptrend. It rose in February and March, retreated a bit in April, and rose again this month. The production and employment components have risen for 4 months. New orders spiked up in March, dropped in April and rose again this month. In short, the indicators within the index are looking pretty good right now.
Back to the MSNBC article:
>Businesses also seem to be getting back in a hiring mood. After a string of subpar monthly gains in employment, hiring in May appears to have picked up again. The latest jobs numbers from the government are due out Friday; economists are looking for non-farm payroll gains of about 130,000 in May, up from 88,000 in April, according a poll of economists by Reuters.
We'll have to see how the employment numbers shake out tomorrow.
Today's construction numbers (detailed below) also indicate business spending is increasing.
In summation, business is looking as though it is spending again. While it's not enough to send the economy into the stratosphere, it may be enough to keep up out of recession.
The biggest wild card in this picture is housing. While I originally thought this sector would cause a recession by now, I think the blog Calculated Risk had the correct answer: housing is going to be a drag on growth for some time. Considering builders don't expect a rebound until 2011 (their words, not mine), I think CR is correct.
This is where my concern about consumer spending really comes into play. We're already one year into the housing downturn. There's only so much bad news people can take before they pull in their wings and slow down their spending. I don't know where that level is (in fact, nobody does). But I think we're closer to it now than we were a year ago.