The April Fool’s economy

The economy seems to have done an about-face over the past three months after the fiscal cliff came to an end. However, in 2012 and 2011 seemingly strong momentum in the first half of the year gave way to summer slumps. The author of the article evaluates evidence to see if this recovery is for real, or another fake-out like years before.

Posted by Ylan Q. Mui
April 1, 2013
Washington Post

The economic recovery has faked us out before. Will it fool us again this year?

The economy seems to have done an about-face over the past three months after the bad dream that was the fiscal cliff came to an end. Housing is rebounding, businesses are hiring and shoppers are, well, shopping. Even the normally reserved Federal Reserve acknowledges that the economy is experiencing “moderate growth.”

But we’ve been to this rodeo twice already. In 2012 and 2011, seemingly strong momentum in the first half of the year gave way to summer slumps. Will the third try be the charm? Or is this just another prank — one that’s getting old fast. We evaluate the evidence.

Housing

This is the most-cited reason why “this time is different.” Ultra-low mortgage rates have helped spur demand in the long-moribund housing market. Meanwhile, the number of homes for sale remains below average. Those factors have helped boost prices by double digits compared to last year. Rising prices should help homeowners who are underwater, eventually allowing them to sell. They also help create a “wealth effect” that contributes to rebuilding household financial security.

But February provided a real-estate reality check. Sales of new single-family homes dropped more than 4 percent from the previous month after a particularly strong January. The pace of existing home sales also slowed. Meanwhile, the number offoreclosures rose slightly.

Not fooled: Economists generally agree that housing really has returned. One reason for February’s weak data may actually be that supply can’t keep up with demand: There simply aren’t enough homes available to buy, slowing down sales.

Manufacturing

The sector has been considered one of the bright spots in the economy since the recession ended. It’s added about half a million jobs since 2009, driven in large part by automakers. A report due out Monday is expected to show that the industry has expanded for four straight months.

Not fooled: Manufacturing was clutch in the early years of this drawn-out recovery, and it’s still holding its own. But the sector has been eclipsed by its cousin, construction. The number of construction jobs added over the past three months is roughly triple that of manufacturing. And because the construction industry is closely tied to housing, the trend is expected to hold through the end of the year.

Stocks

Two of the most closely watched stock-market indicators — the dowdy Dow Jones industrial average and the broader Standard & Poor’s 500-stock index — hit all-time highslast month. The gains most closely mirror the record profits enjoyed by some of the country’s largest companies, but they also amount to a vote of confidence by investors in the U.S. economy. The surging stock market has also helped restore many Americans’ retirement savings. According to Fidelity Investments, workers’ 401(k) balances reached $77,300 at the end of last year, the highest level ever.

Fooled: There’s no doubt that the stock markets have regained much of their value since bottoming out in 2009. But if you factor in inflation, the Dow actually would have to cross 16,000 to reach a true record high. In addition, the bull market has been supported in part by the Federal Reserve’s easy money policies. Its massive bond-buying program has pushed down yields on Treasuries, forcing investors into stocks to increase their returns. If the Fed bungles the stimulus end game, markets could panic.

Consumers

If Americans like to do one thing, it’s shop. And it’s a good thing for the economy: Consumer spending fuels about two-thirds of the nation’s gross domestic output.

Their resiliency was tested this winter as the threat of the fiscal cliff — higher taxes combined with severe spending cuts — loomed over the country. But the fight barely seemed to register with consumers, who didn’t hold back for Christmas and kept right on spending through the new year. The jump in spending in February was the biggest in half a year.

Fooled: This is one area that economists have loaded with caveats. Many had predicted spending already would have dropped off due to the increase in the payroll tax that began showing up in paychecks at the start of the year. Now economists say that the effects are simply delayed as the weekly shortfalls begin to pile up. One compelling piece of evidence supporting that theory is the substantial decline in the personal savings rate. After reaching as high as 8 percent during the turbulent days of the financial crisis, it dropped to 2.6 percent in February — the same rate as when the recession began.

Jobs

The biggie. A robust job market could trump a lot of other problems. (Though, to be fair, a robust job market would probably be the result of the resolution of those other problems.) The good news: The number of jobs created has topped 200,000 for three of the past four months across a broad swath of industries. The bad news: The sequester hasn’t been factored in yet, and the across-the-board government spending cuts are certain to dampen the results over the next few months.

Jury’s out: The next jobs report is due on Friday, and it will help reveal whether the private sector has strengthened enough to overcome the headwinds from Washington. In other words, if the labor market can withstand Sequestration, Month 1, it will send a strong signal that the recovery really is getting traction.

Bottom line

So, is the economy pulling the ultimate April Fool’s prank? Looks like it’s a draw for now, with the swing vote coming with the jobs report on Friday.

(C’mon, did you really think we would make a call without the latest jobs number? Now THAT would be foolish.)

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