A Most Confusing Economic Situation


You all know about the employment report today and no doubt didn’t miss the pull back in pending home sales that was reported earlier this week. Throw on the increasingly massive problems with commercial real estate and you can paint a pretty awful scenario for growth in 2010.

Just to put a nice bow on the headwinds that the economy has to sail through, consider this from the Fed this afternoon:

Consumer credit decreased at an annual rate of 8-1/2 percent in November. Revolving credit decreased at an annual rate of 18-1/2 percent, and nonrevolving credit decreased at an annual rate of 3 percent.

OK, you look at all of this and it’s hard to see how any meaningful recovery is going to take shape. The twin pillars of the American economy, housing and the consumer, are for all intents and purposes non-factors at this particular point in time and unemployment shows all the signs of being a problem that will take years to work through.

But then consider these pieces of data:

Chris Varvares, economist at Macroeconomic Advisers LLC, estimates U.S. gross domestic product grew at a 5.4% annual rate in the fourth quarter and that output-per-hour of non-farm workers (i.e. labor productivity) grew at a 6.5% annual rate. In normal times, 2.5% productivity growth is considered really good.

Of course, these aren’t normal times. While labor is suffering, productivity is booming. It grew at an 8.1% annualized rate in the third quarter and a 6.9% annualized rate in the second quarter. That averages out to a growth rate of more than 7% during the past nine months, much faster than anything registered during the tech boom.

The last time productivity grew at such a fast rate, in the early 1960s, corporate profits took off. Mr. Varvares says it should eventually lead to an upturn in job growth as well. (WSJ)

And from a separate WSJ article:

On a day marked by otherwise disappointing news about the health of the labor market, Alliance Bernstein’sJoseph Carson has a strikingly upbeat assessment of the economy in his weekly economic commentary today.

He says the manufacturing sector is in the midst of staging its starkest turnaround in a quarter century.

Mr. Carson tallied up manufacturing shipments from Census Bureau data and changes in manufacturing inventories. The combination of rising shipments and the end of massive inventory cuts means manufacturing output grew at a 20% annualized rate in the fourth quarter, he says. That would be the biggest quarterly increase since 1983, when the U.S. was bouncing back from another deep recession.

He also notes that data from the Institute for Supply Management’s monthly survey of supply managers suggests that new order growth is outstripping inventory growth, meaning there are “plenty of production gains in the pipeline,” he says.

I think the productivity numbers might be subject to some sort of one-off computational quirk that’s pushing them this high, nevertheless even if the numbers are halved it’s still impressive. Having said that, this is a circle that’s pretty hard to square. The supposedly weak sister of the American economy — manufacturing — is beginning to look like the engine that might pull the economy, at least until some other sectors find their sea legs.

I’ll admit to still being in the bear camp but I’m prepared to be surprised through at least the first quarter. Something is going on that I haven’t seen adequately parsed and it’s not all bad. The key might be whether it has the staying power to spill over into the rest of the economy and light some fires.

Any thoughts on this are most appreciated.

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