The US economy is now experiencing a normal recovery. The best sign of this is when policymakers start worrying about inflation rather than deflation.
In the future, expect to see less focus placed on the problems associated with a slow-growing economy such as high unemployment, investor and consumer pessimism, cash hoarding, deflationary prices, and a dismal housing market.
The Federal Reserve will increasingly shift its attention to price inflation, and must decide when it will back away from its promise to keep short-term interest rates fixed at close to 0% until 2014. Without question, this decision will happen sooner rather than later. Listed below are some of the most important signs the economic recovery is approaching normality:
1. Increase in Payroll Employment: The increase in payroll employment in February (which amounted to 227,000 new jobs) was the third-straight month the number of new jobs created exceeded 225,000. More importantly, the Department of Labor revised the number of jobs created in January upward from 243,000 to 284,000. Had the weather pattern over the last few months not adversely affected construction and manufacturing, jobs created in February would have been much greater. If March payroll employment increases by 250,000 or more, it will be very hard for the Federal Reserve to continue to sit on the sidelines in regard to interest rates.
2. Increase in the Civilian Labor Force: One of the most important but frequently overlooked data points is the change in the size of the civilian labor force. During the recession and when the economy was recovering very slowly, the civilian labor force decreased significantly because discouraged workers dropped out of the labor market. However, in January and February, the civilian labor force expanded by 508,000 and 476,000 workers respectively. Over the next two or three months, significant increases in the size of the civilian labor force will be a healthier sign of an improving economy than a declining unemployment rate. This is because the unemployment rate can decline when discouraged workers drop out of the labor market. On the other hand, when job prospects are improving, discouraged workers reenter the labor market, and as they search for work they are classified as unemployed. As a result, the unemployment rate can increase even when job prospects improve. Look for an expansion of the civilian labor force of about one-half million or more workers. If so, it would be one of the strongest signs yet of a solid economic recovery.
3. Reduction in New Claims for Unemployment Insurance: When workers are laid off, one of the first things they do is file a claim for unemployment compensation. Therefore, when the economy is struggling, the number of fresh claims increases significantly. At the peak of job losses following the 2007 recession, this number exceeded 600,000, but it is now down to 352,000. The US economy is dynamic, so workers are always being hired and laid off. In normal circumstances, we would expect unemployment insurance claims to average about 320,000 per week. Current claims are above that number but significantly below the average of the last 12 months, which was 402,000.
4. Other Notable Metrics: Other metrics to keep an eye on are as follows, the unemployment rate, which is currently at 8.3%, and the personal savings rate, which is meanwhile at 4.6%. The rationale for tracking the unemployment rate is obvious. We track the savings rate because it is an indicator of the extent to which consumers are confident enough to spend, rather than saving money for precautionary reasons. Other important indicators are housing starts and building permits, currently at 698,000 and 717,000 respectively; automobile and truck sales, currently at 15 million units; and the price of domestic spot oil, which is up to $1.06 per barrel. The price of oil has increased significantly over the last two months, but neither it nor the European debt crisis will slow down the US recovery. It is simply too robust to be derailed by oil prices that are a temporary response to geopolitical events. Furthermore, the economy has proven to be immune to the European debt crisis. This is because the chaos in Europe has already been factored into US market outlook and China, India, Russia and Brazil together are much more important in regard to total world output.