“We believe that the U.S. is best positioned for both a cyclical recovery and dealing with … its growing debt burden,” advised Goldman Sachs’s chief investment officer for private wealth management, Sharmin Mossavar-Rahmani, to the firm’s clients in her investment management division’s “outlook.” There are the usual caveats, but all in all this report trumpets “the economy’s continued upward trajectory in face of a variety of destabilizing shocks…”
Friday’s jobs report supports this guarded optimism. The private sector added 212,000 jobs in December, more than offsetting the 12,000 reduction in public sector employment. Almost every sector of the economy recorded gains. The unemployment rate dropped to 8.5 percent, the lowest since February 2009, from a revised November figure of 8.7 percent.
Not all of the news was good: The number of long-term unemployed is stuck at 5.6 million, 42.5 percent of the total unemployed. And most experts agree that it will take 250,000 new jobs per month to get the unemployment rate down closer to the 8 percent level that President Obama would like to take into the year-end elections. Still, few doubt the labor market is improving, although some challenge the conclusion of Alan Krueger, chairman of the president’s council of economic advisers, that this makes it “critical that we continue the economic policies that are helping us to dig our way out of the deep hole that was caused by the recession of 2007” which, of course, was not caused or deepened by the current resident of the White House, but by his predecessor.
There is little that is not at least mildly cheering in the other news since the last bottle of champagne was drained on New Year’s Eve. The Lindsey Group reckons that the jobs report is consistent with an economy growing at an annual rate of 3.5 percent. Spending on construction projects, although still only half of what is considered a healthy rate, increased in three of the last four months for which data is available. The manufacturing sector has grown for 28 consecutive months, with the December growth rate the fastest in six months. The better news is that the sector seems set to grow even faster to replace depleted inventories: The Institute for Supply Management’s index of new orders is up, a sign that output will follow.
Autos are leading the parade. General Motors, Ford, and Chrysler reported year-over-year sales gains of 13 percent, 11 percent, and 26 percent, respectively, with demand for pickup trucks and Chelsea tractors leading the way, to the undoubted chagrin of the White House green brigade. The Detroit trio benefited from the appeal of their new models, the fact that Toyota and Honda have been hit by supply disruptions from the March earthquake in Japan and flooding of their plants in Thailand, and the lingering hit to Toyota’s reputation by its multiple quality problems and subsequent recalls in 2010. The Japanese companies both recorded sales drops of 7 percent.
Autos are not the only manufacturing sector that is growing. Makers of paper products, textiles, machinery, and other sectors also recorded gains. As did retailers at the high and low ends of the price spectrum. Saks Fifth Avenue and Nordstrom’s rang up December sales increases of almost 6 percent and 9 percent, respectively, while lower-end J.C. Penny, Sears, and Kmart fared poorly, the latter two in part because of a failure to invest in store upgrades in recent years.
The hospitality industry is mimicking the experience of retailers. Upscale hotels have been able to raise room rates 13 percent, and luxury hotels have done even better, increasing rates by 21 percent according to Smith Travel Research. Four Seasons Hotels and Resorts reports that room rates are up 9 percent this year, good news for Saudi prince Alwaleed bin Tal and Bill Gates, whose investment arms bought the hotelier for $3.4 billion in 2007.
From which politicians draw support for their opposing policy positions. The president and Democrats say that the affluent customers of Saks Fifth Avenue should willingly surrender a stay in a high-priced hotel to pay higher taxes to help bring down the deficit. Republicans respond that it is the spending and investment of these high earners that is keeping the economy moving forward, and that it would be counterproductive to drive them from the shops and reduce their incentive to invest and create jobs by commandeering a larger portion of their incomes to fuel the government’s spending and failed investments, the latter most notably in solar energy where bureaucrats without the incentive of bearing the cost of wrong decisions are lavishing billions of what they think will be winners. Experts in appraising voter sentiment tell me that with the Republicans having formed a circular firing squad in their fight for the presidential nomination, and the president able to command the media and present a single message, Obama is winning this argument.
There reasons other than the economic data for seeing a ray of light at the end of what has been a very long tunnel. For one thing, there are tentative signs that the U.S. is decoupling from Europe, at least to the extent that every bit of bad news from Berlin, Paris, and Brussels no longer sends share prices into a tail spin. Reports that some eurozone bank is in real trouble no longer cause a panic among holders of shares in American banks. That could change if the news from the eurozone gets worse, but for now U.S .markets seem to have priced in a European recession and the kick-the-can-down-the-road policy of the eurocracy.
Another bit of good news is that the American consumer seems to be digging himself out from under a mountain of debt. Thanks to low interest rates, defaults, and spending restraint, household financial obligations—loans, rents, and leases—are absorbing around 16 percent of household income, the lowest slice since 1993 and down from a 2007 peak of almost 19 percent. This means households have more income available to cover mortgage payments should they buy a new home. Low mortgage rates—under 4 percent for 30-year fixed rate mortgages—and depressed prices have pushed homebuyer affordability to record levels, especially for buy-to-rent investors capitalizing on the boom in the rental markets, where vacancies are now at historically low levels.
Even a small recovery in the housing sector, which has been a drag on the economy, would be good news indeed. A few days ago Federal Reserve Board chairman Ben Bernanke sent a 26-page letter to Congress, “Restoring the health of the housing market is a necessary part of a broader strategy for economic recovery,” Bernanke wrote “Continued weakness in the housing market poses a significant barrier to a more vigorous economic recovery.” Among other things, the Fed is recommending that Fannie and Freddie, the government mortgage agencies that now buy almost all the new mortgages, cut borrowers’ loan balances. That would in effect pass the bill for these writedowns on to taxpayers, not an idea that has much support from tax-paying homeowners who have kept up their mortgage payments. Or from conservatives who fear moral hazard.
The household sector is not alone in its deleveraging. Financial firms have brought their debt-to-GDP and debt-to-shareholder-equity ratios down to levels not seen in decades, and corporate balance sheets show historically low debt, and historically high cash balances.
So much for the near-term. Goldman Sachs concludes with a paean to American exceptionalism, including our demographics, innovation, superior management, and other forces that are driving “an increasing number of large companies” to relocate some of their operations to the US.
Now, if our political class would end its food fight and get our fiscal house in order, there will be less talk of American decline.
