published Wednesday, June 25th, 2014

Why a grim U.S. economic picture is brightening

A salesmen at a car dealership digs out cars covered in snow Indianapolis, as temperatures hovered around zero in January. The blast of Arctic chill and snow during the first quarter of 2014 shuttered factories, disrupted shipping and kept Americans away from shopping malls and car dealer lots.
A salesmen at a car dealership digs out cars covered in snow Indianapolis, as temperatures hovered around zero in January. The blast of Arctic chill and snow during the first quarter of 2014 shuttered factories, disrupted shipping and kept Americans away from shopping malls and car dealer lots.
Photo by Associated Press /Chattanooga Times Free Press.

WASHINGTON — When the government updates its estimate Wednesday of how the U.S. economy fared last quarter, the number is pretty sure to be ugly. Horrible even.

The economy likely shrank at an annual rate of nearly 2 percent in the January-March quarter, economists estimate. That would be its bleakest performance since early 2009 in the depths of the Great Recession.

So why aren't economists, businesses or investors likely to panic?

Because most agree that the economy last quarter was depressed by temporary factors — particularly the blast of Arctic chill and snow that shuttered factories, disrupted shipping and kept Americans away from shopping malls and auto dealerships.

Since then, the picture has brightened. Solid hiring, growth in manufacturing and surging auto sales have lifted the economy at a steady if still-unspectacular pace. That said, sluggish pay growth and a stumbling housing rebound have restrained the expansion. But the economy's recovery continues.

"We had a very bad first quarter, but the first quarter is history," says Craig Alexander, chief economist at TD Bank. "It doesn't tell you where the economy is going, which is in a direction of more strength."

Wednesday's report will be the government's third and final estimate of the economy's first-quarter performance. Here are five reasons economists are looking past last quarter's dismal showing and five reasons the economy still isn't back to full health.

HIRING IS ROBUST

If the economy really was tumbling back into recession, you'd see businesses laying off workers -- or at least clamping down on hiring. That isn't happening. Employers are adding jobs at the fastest pace in 15 years. That's a pretty clear sign that they see last quarter's troubles as temporary. And layoffs are down. The number of people seeking unemployment benefits, a proxy for layoffs, has fallen 10 percent since the first week of January.

WINTER BLAST

With summer in full swing, it might be hard to remember the brutal winter. But the cold damaged the economy last quarter. Spending on autos, furniture, clothes and other goods rose at the slowest pace in nearly three years. With snow blanketing building sites, home construction plummeted in January. Alexander estimates that winter weather slowed economic activity by about 1.5 percentage points on an annual basis.

Yet the impact didn't reflect fundamental problems in the economy. Americans who postponed car purchases during winter simply bought cars during spring instead. Auto sales jumped to a nine-year high in May.

CLEARING OUT STOCKPILES

Another drag on growth last quarter was probably also temporary: Companies sharply cut back on their restocking of goods. That wasn't unexpected. It occurred after companies had aggressively ramped up restocking in the second half of last year. The slowdown in the January-March quarter reduced annual growth by 1.6 percentage points, the government said. With growth strengthening since spring began, businesses are restocking at a faster rate again. Inventories grew 0.6 percent in April, the most in six months.

HEALTH CARE COMPLICATIONS

Last quarter's economy will look bleak in part because the government needs to correct a mistaken assumption. It previously figured that health spending soared last quarter after many Americans obtained insurance on the Obama administration's health care exchanges. But when data was released this month, there was no sign of such additional spending.

As a result, consumer spending probably grew at a 2.3 percent annual rate last quarter, not the 3.1 percent previously estimated, according to JPMorgan Chase. Consumers have accelerated spending since then: Retail sales surged in March by the most in four years -- and again in April and May, boosted by auto purchases. This month, consumer confidence reached a six-year high. That's a hint that spending will further strengthen.

MANUFACTURING GAINS

After slipping in the first quarter, partly because of weather-related disruptions, factories are making more machinery, cars, furniture and computers. They're hiring and giving workers more overtime, which translates into bigger paychecks.

Jason Anderson of CertainTeed, a manufacturer in Valley Forge, Pennsylvania, said sales of the company's roofing shingles, siding, insulation and other building products have rebounded since last quarter. The company is building a 150,000-square-foot factory in Jonesburg, Missouri.

"We're still optimistic about the growth trajectory of the United States," Anderson says. "All our plans are still on track."


Most analysts think the economy is growing at a 3.5 percent annual rate in the current quarter and will expand at a 3 percent rate for the rest of the year. The Federal Reserve foresees a similar improvement.

Still, that pace would leave growth for the full year at about 2.25 percent, only slightly above last year's 1.9 percent. And despite all the positives, it's worth keeping in mind that a truly robust economy wouldn't be thrown off so much by severe weather.

Here are signs that the economy still hasn't achieved full health:

HOUSING SLOWDOWN

At the top of most economists' worry list is housing. Rising home prices and higher mortgage rates have put homes out of reach for many would-be buyers. Even for people willing and able to buy, there aren't enough homes for sale. All of which has slowed purchases, which fell 5 percent in May compared with 12 months earlier.

Builders started work in May on just over 1 million homes at an annual rate, below the pace of the final three months of last year. The slowdown translates into fewer construction jobs, smaller commissions for Realtors and reduced sales of furniture, appliances and garden supplies.

Yet there are signs that the housing market is stabilizing. Price gains are slowing. And mortgage rates have dipped. That could boost sales in coming months.

In fact, data released this week suggested that this may already be happening. Sales of new and existing homes jumped in May.

HIGHER GAS PRICES?

Another threat: Middle East turmoil, particularly in Iraq, could cause oil and gas prices to spike. That would leave consumers with less money to spend on other goods and could limit growth. Crude oil prices hit a nine-month high Thursday. Gas prices averaged $3.68 Monday, about a dime higher than a year ago.

STAGNANT WAGES

While layoffs have fallen back to pre-recession levels and hiring is steady, the economy still isn't delivering what most Americans probably want most: A decent raise. Average hourly pay, adjusted for inflation, slipped 0.1 percent in May compared with a year earlier. It's still slightly lower than when the recession ended in June 2009. Flat pay limits consumer spending, which drives about 70 percent of economic activity.

LONG-TERM UNEMPLOYMENT

Despite the pickup in hiring, 3.4 million Americans have been out of work for six months or longer -- more than double the pre-recession figure. Some may find jobs as the economy recovers. Others will give up searching and return to school, retire early or care for relatives. Economists worry that the longer people are out of work, the more their skills erode. Having many former workers permanently frozen out of the job market can slow growth. Last week, Fed Chair Janet Yellen expressed concern that long-term unemployment could create "permanent damage" to both those suffering through it and the broader economy.

UNEMPLOYMENT NOT AS GOOD AS IT LOOKS

The unemployment rate has fallen to 6.3 percent, a five-year low, from 10 percent in October 2009. But much of the drop has occurred because many people have given up on their job searches, retired or stayed in school and never started looking. The government counts people as unemployed only if they're actively seeking work. The rate has tumbled in large part because many of those out of work aren't being counted as unemployed, not because hiring has soared. The percentage of Americans working or looking for work has reached a 35-year low.

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