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Posted: March 20, 2012

Slow growth beats no growth

It's a good news/not as good news situation

Jeff Thredgold

The “good” news?  The U.S. economy has now been in growth mode for 33 months, ever since the Great Recession ending in June 2009. The “bad” news? U.S. economic growth has averaged a 2.4 percent real (inflation adjusted) annual growth pace since the expansion began, the weakest economic expansion since the 1940s.

The long-in-place economic headwinds of weak American home values; anxiety about European financial strife getting worse; fear of Iran’s nuclear ambitions leading to a Middle Eastern conflict, with even higher oil prices; and consumer anxiety about the size, growth and direction of the U.S. government, limit American economic growth opportunities. U.S. real growth of 3.0 percent during 2010 gave way to a very modest 1.7 percent real growth pace in 2011. Most forecasters see real growth this year near 2.4 percent.

U.S. Employment

The U.S. economy’s net addition of 227,000 jobs during February 2012 was one more sign of an American job creation machine finally shifting into a higher gear.The 227,000 net job gain slightly exceeded forecasting economists’ view of a 210,000 job rise. In addition, estimated job gains of the two prior months were revised higher by 61,000 jobs.  February’s rise capped the best six-month streak of job growth since 2006.

As expected, the nation’s unemployment rate remained at 8.3 percent in February, a three-year low.  The nation’s unemployment, or jobless rate, is derived from a survey of households that is different from the “official” job creation survey data.  The estimated 428,000 rise in employment as measured in the household survey was largely matched by the estimated 476,000 rise in the nation’s civilian labor force.

We have long suggested that if and when U.S. employment gains were stronger, hundreds of thousands of people who had formerly left the labor force as discouraged workers would return to seek more readily available jobs.  Such was the case in February.  We expect more of the same in coming months, leading to no major downward move in the nation’s jobless rate prior to year-end.

More than 1.2 million net new jobs have been added in the U.S. economy over the past six months, with a gain of nearly 3.4 million net new jobs since the end of 2009.  However, such gains represent only 40 percent of the 8.5 million net jobs lost during the Great Recession, which ran from December 2007 to June 2009.

U.S. Inflation

Consumer prices rose 3.0 percent during 2011, with consensus expectations that such prices will rise near 2.2 percent this year.  One key will obviously be oil prices, which have been pushed higher in recent months by worst case fears about a closure of the Strait of Hormuz by the Iranians or an Israeli or U.S. (or both) attack upon Iranian nuclear installations.

Apart from oil, enough slack remains in U.S. and global labor markets to largely keep inflation pressures in check.  Note that some prominent Wall Street-types are more fearful of deflation than inflation in coming years.

The Federal Reserve

Fed Chair Ben Bernanke has taken all the fun out of being a Fed-watcher.  The “old days” of trying to decipher every work, every nuance of Fed commentary or eyebrow twitching has now given way to the most recent Fed statement that the most important interest rate – the federal funds rate – will remain at an all-time low target range of 0.00 percent-0.25 percent until late 2014

Housing and Mortgage Rates

The painful fall of more than one-third in average U.S home values during the past five years could end later this year.  Note: Economists said the same thing in 2010 and 2011.

Sustained, if not impressive U.S. economic growth, rising employment, and our collective sigh of relief of having dodged any major new bullets during the past three years suggests that housing values are attractive.  Foreign buyers are busy buying U.S. properties…seeing great values.  Thirty-year fixed-rate mortgages for conventional loans are now in the “high 3s," a level not seen in 60 years.

The Tea Leaf is a weekly economic and financial update by Jeff Thredgold, economist for Vectra Bank Colorado. He has been writing an economic update every week for the past 31 years and is the only economist in the world to have received the designation of CSP, or Certified Speaking Professional. Republished with permission from the Tea Leaf by Jeff Thredgold, whose site address is www.thredgold.com/html/leaf.html.
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