Since 2009, thanks to the extremely low interest rates and some stimulus from the government, consumer spending which makes up about 70% of U.S. economic activity, has been plugging along. Nearly half of GDP growth last year was from business purchases of equipment and software.
But that hasn’t been nearly enough. During the recession GDP shrank by 5%. In reality, it took from June 2009 until last quarter just to recover. Now indicators support a forecast of 3.5% GDP growth this year, up from 2.9% posted during 2010.
The Consumer Confidence index is now above 60 for only the second time since it took a downward dive from a pre-recession high of over 100 to a recession low of 25. And consumers are starting to spend more. January sales were up from last year and car dealers alone experienced more customer traffic and more sales. In fact, consumer spending surged in the fourth quarter last year with an increase of 4.4%. Experts predict that a gain of about 3% is likely this year following an increase of 1.8% in 2010.
The Cause And Effect
As consumers spend more and exports continue to increase, businesses will see more demand. There have been gains in durable goods orders for 4 out of the last 5 months. In January, a survey of purchasing managers in manufacturing indicated that activity was at a seven-year high. The survey of purchasing managers in service industries indicated the strongest showing since 2006!! Now that gives one some hope!
All of this spurs optimism, which then further encourages a stronger economy. Even in the most repressed industry – home building – rock bottom seems to have been reached. In addition, in the stock market, the Standard & Poor’s 500 index nearly doubled in the past two years, and it’s climbing higher with the expectation that there will be additional gains in corporate profits.
Though changes are coming slowly, manufacturers began adding to their staff in 2010 for the first time in 10 years. And initial filings for unemployment insurance payments have been trending downward for months now.
Two Sides To Every Coin
On the other hand, the housing industry is still staggering – which is horrible news considering 2 million construction workers lost their jobs over the past three years and of course this trickles down to the manufacturers and store owners who deal in tile, furniture, appliances, carpet, etc. Additionally, budget cuts by state and local governments will take away from gains made in other sectors.
Federal Chairman Ben Bernanke said earlier this month, “The economy, though it appears to be growing, is still in a deep hole.” So while we’re not moving at warp speed, we seem to at least be going down the right road.