Economy Enters New Phase of Recovery (12/20/2013)

What’s new about the current phase of the economic recovery is all sectors are moving forward in sync. It’s like an automobile that is firing on all cylinders, rather than a few. This is not happened in the four and one-half years since the great recession ended.

When the recovery began, government spending from the fiscal stimulus program carried the economy forward. As the stimulus program was phased out, consumer spending on automobiles and residential construction kept the economy afloat. The missing link, and the primary reason why more jobs were not created, was corporate investment. CEOs preferred to sit on the sideline and hoard money rather than invest it. Now, corporations are investing.

Why did the unemployment rate fall to 7% and the economy create 203,000 jobs last month? Simple, corporations are investing, which creates opportunities for small businesses that operate within their supply chain. As small businesses get healthier, they hire more workers, and as employment increases retail spending goes up. So the short explanation for the increase in employment is small businesses are hiring. But the bigger picture is corporate investment.

It is quite unusual to see so many economic indicators improve at one time. For example, last month all industries posted a significant increase in new jobs. Additionally, new data reveals the increase in productivity last quarter was twice the rate that occurred during the previous two quarters. Furthermore, the economy grew at a surprising rate of 3.6%, almost a full percentage point higher than was originally estimated. One explanation for the growth is the accelerating pace of residential construction and auto sales, which have been unfazed by the prospect of higher interest rates.

Despite the good news, there are still some alarming signs. Most notably, persons who are unemployed long-term (meaning about a half year or longer) have not been able to find jobs. Secondly, over the last two weeks we have witnessed a surge in the number of new claims for unemployment compensation. Finally, workers are being rehired at salaries that are much lower than those of the jobs from which they were displaced.

This suggests there still is lots of room for improving the performance of the economy. However, the recovery has at last hit a pace that if sustained will restore a normal job market.