The FED is Wrong; Employment Growth will be Sustained in 2012

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The economy is now growing at 3%, and the unemployment rate decreased to 8.3%. Times are better than just about all economists predicted several months ago. In December, the Gazelle Index forecast this trend would occur, and we also predicted that by election time in November 2012, the jobless rate will declined to 7.5% or lower.

At the end of last year, most analysts thought the economy would not grow faster than 2% or 2.5% and the unemployment rate would remain stuck in the high regions of eight percentage points – they have been proven wrong.

A new debate now centers on whether the present growth in economic activity and employment are sustainable. Like most other economists, the Federal Reserve was surprised by the ongoing growth. The growth creates an uncomfortable position for the FED because it vowed to keep interest rates fixed through 2014. This week, the FED reiterated once again it expects the improvement to be short lived.

The Fed is predicting economic growth will range between 2.3% to 2.6% throughout the remainder of 2012 and the unemployment rate will not fall much lower than it is. Again, the Gazelle Index takes issue with the pessimistic forecast and outlines the reasons below why we feel the economy will continue to grow and produce more jobs.

Here are some reasons that favor continued economic growth:

New claims for unemployment compensation reached the lowest level in four years, 351,000 weekly. This suggests companies are no longer focusing on cutting back their workforce.

The labor force expanded by over 508,000 workers last month, and the unemployment rate still declined. Normally, when so many workers enter or reenter the labor market, unemployment increases, temporarily. Job growth was so strong in January the labor market absorbed the new and returning workers and added additional jobs. Overall, 847,000 more people were employed in January 2012 than were employed in December 2011.

The savings rate of consumers is 4.6% – close to a record, and growth is still occurring. When consumers are saving this much, it means they are spending less, and consumer spending accounts for over two-thirds of GDP. Recently, the government revised its estimate of consumer spending for the third and fourth quarters of 2011. The revised estimate places the average savings rate at 4.5%. This means the growth has been accompanied by high levels of consumer savings; therefore, the latter will not put a brake on economic growth.

Sales of automobiles and trucks totaled 1 million units above the level over the last 12 months. Sales increased by 4.4% between December and January.

Residential fixed investment increased by 11.5% in the fourth quarter of 2011. The total number of housing starts in January reached 699,000, which represented a 13% increase over the previous 12 months. New home sales reached 321,000 units, which represented a 7.4% increase over the previous 12 months. Continued growth in this sector is significant because 30% of all workers who remain unemployed since the recession are in construction. During the fourth quarter, residential fixed investment experienced the second largest increase of any component of GDP.

Corporations are now spending and investing. Last year corporations were sitting on over $2 trillion of cash reserves, which represented a 25% increase over the normal cash balances. As they gained more confidence, they began investing the excess cash, and the economy started growing. This caused an enormous stimulus effect, which has helped small businesses.  The majority of small business employers are suppliers to major corporations. The latest employment report by ADP indicated 55% of the gain in jobs during February was situated in businesses with fewer than 50 employees.

Finally, Oil price increases will not derail economic growth. We believe the run-up in oil prices is temporary and in response to geopolitics. Furthermore, short-term increases in prices reduce consumer spending modestly and thereby decrease the pressure on the Federal Reserve to intervene in the growth process. Ordinarily, the Federal Reserve would slow down growth out of fear of the inflation it usually causes. So there is an unintended positive benefit to high oil prices- despite the pain the prices cause at the pump.

Last modified: June 20, 2017

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