Job Gains Surpass Expectations

Economic indicators released in the early part of this year suggest that the U.S. economy continues to expand, albeit at a modest pace of between 2 and 3 per cent. Real GDP grew at a close to 3 per cent clip in the final quarter of 2011. Home sales and manufacturing activity are increasing, and there was also a welcome surge in employment last month. The U.S. Federal Reserve recently announced that it will support the economy by keeping interest rates low for the next two years and that authorities will not hesitate to inject additional liquidity into financial markets if warranted.

Real GDP grew by 2.8 per cent in the fourth quarter of last year, up from 1.8 per cent in the third quarter. The higher growth was primarily a result of a large swing in inventories, which contributed around two-thirds of overall economic growth in the final quarter of 2011. Trade was a net drag on growth, as the recession in Europe has resulted in weaker demand for U.S. exports. The effects of cuts in government spending were readily apparent from the fourth-quarter GDP report. The drop in government spending reduced GDP growth by close to 1 percentage point, and this trend will continue over the near term as governments—especially at the state and local levels—grapple with high deficits.

Real GDP grew by 2.8 per cent in the fourth quarter of last year, up from 1.8 per cent in the third quarter.

A factor that will continue to support the economy is manufacturing. Factory conditions improved for the third consecutive month, as the Institute for Supply Management’s (ISM) index of manufacturing activity rose 1 percentage point to 54.1 in January. The most encouraging part of the ISM report was the gain in the “new orders” component of the index, a development that bodes well for future production. The employment index was fairly flat in January, suggesting that the labour market is holding steady in the early part of 2012.

Consumer confidence unexpectedly fell in January, indicating that households remain uncertain about the durability of the economic recovery. The Conference Board Inc.’s index of sentiment dropped to 61.1 from 64.8 in December. We had anticipated another gain in confidence given the fact that labour markets have been improving and that the unemployment rate has declined in recent months. Also, labour income has been on the mend. Factors that may have derailed confidence somewhat in January were higher gasoline prices and the uncertainty generated by Congress’s inability to extend the payroll tax holiday and emergency UI benefits for the entire year.

Employment rose by a much-higher-than-expected 243,000 in January, and the unemployment rate dropped to 8.3 per cent.

A factor that could put households in a better frame of mind was the latest jobs report. Employment grew by a much-higher-than-expected 243,000 in January and the unemployment rate dropped to 8.3 per cent. Job gains were widespread across the economy, with large increases in professional and business services, leisure and hospitality, manufacturing, and construction. The increase in construction jobs could be a result of an unusually warm January. As has been the case the past two years, the government sector continued to shed jobs—although the loss of 14,000 positions was not as deep as seen in recent months. Governments, especially at the state and local levels, have been forced to trim employment to help balance their books.

U.S. monetary authorities continue to be cautious about the economy, and last month they announced that interest rates will be kept at rock-bottom levels through most of 2014. Until that announcement, the Fed had only committed itself to keeping interest rates at close to zero until the middle of 2013. The even-longer period of low short-term interest rates should place additional downward pressure on long-term rates, a development that could provide a lift for mortgage refinancing, equity prices, and sales of vehicles and homes.