US Economy: Growth Still Solid

Is the US economy about to save the world? We all hope so.

It will be an unlikely situation if it does as the economy is not in tip top condition.

But it is about the only major global economy with any growth potential this year, so a lot is riding on the US.

Therefore the question is, or rather, the hope is that the economy will keep growing like it did in the closing months of 2011.

US analysts say growth is currently around 2% (better than the 1.7% rate for all of 2011).

We will know in a month's time when the first estimate of first quarter GDP is released, but it would not surprise to see the economy do better than 2%, especially if next week's March jobs data is solid.

Certainly the US economy is stronger than the UK economy, which contracted by 0.3% in the 4th quarter, according to figures this week.

The NZ economy grew 0.3%, the Australian economy was up 0.4%, but most of Europe contracted.

But there are shoals ahead: the elections in November, more budget fights this year and in 2013, and a growing belief that the three year surge in corporate earnings has ended.

All could end the sharp rebound in the stockmarket and the economy and confidence might take a breather.

And for Australia, facing a tough budget for 2012-13, a strong and growing US economy would be good news for the knock on impact it would have on Chinese exports and imports, as it is already having on Japan.

Certainly America's the key policymaker, Fed chairman Ben Bernanke is not a strong believer in the stronger for longer argument about the US economy at the moment.

He wants more data on jobs and the economy for longer to be convinced, having been burnt in 2010 with his talk about 'green shoots' which turned into weeds.

As he said at the start of this week, the economy needs to grow more quickly to bring the unemployment rate down further.

In saying that he raised the hopes of speculators and some lazy investors that the Fed might be ready for another round of easing if the economy does slow and the surge in new jobs is halted.

Gold, oil, commodities generally and shares staged a two day rally, and then faded as investors realised that the Fed Chairman was arguing with himself about whether the economy was as strong as it looks and the stockmarket thinks.

While he offered no indication the Fed is moving to a third round of easing (by bond purchases), Dr Bernanke also made clear the central bank is in no rush to reverse its policy of low interest rates and an expanded balance sheet.

It's not that he's gloomy, it's just that he wonders if the recovery might be ended early as it was in 2010 and 2011 by the euro crisis, or another problem (such as high oil and petrol prices).

Certainly Dr Bernanke was more upbeat about banks in an interview with US TV a day after his speech in Washington on Monday.

"The financial system looks stronger and more stable and we are getting more lending," he said in an interview with ABC News.

And, some of the issues related to the European crisis have become less worrisome, he added.

In fact his counterpart at the European Central Bank, Mario Draghi, on Wednesday indicated he though the euro crisis was all but over, but not the long slog back to full recovery.

We will know next week if March was another good month for the US jobs machine and whether it can build on the gains that have seen the jobless rate drop to 8.3% from 9.1% midway through 2011, and more than 2 million new jobs created in the past year.

Mr Bernanke again said the fall in the unemployment rate was "somewhat out of sync" with the rather modest pace of economic growth, a point he and other Fed members have made a couple of times this year.

He said the decline could reflect an effort by businesses to recalibrate their payrolls after unusually heavy job cuts during the recession. If this is the case, he said, progress may stall.

"To the extent that this reversal has been complete, further significant improvements in the unemployment rate will likely require a more rapid expansion of production and demand from consumers and businesses, a process that can be supported by continued accommodative policies," Bernanke said in his speech on Monday night, our time.

After its last two meetings this year, the Fed said it would likely keep rates near zero at least through late 2014, but the improving economy, including the sharp employment growth, have led investors to believe a rate rise (from the zero bound level in place since December 2008) could happen early in 2013.

Monday's speech was seen as Dr Bernanke's pushing back against those expectations.

"The continued weakness in aggregate demand is likely the predominant factor.

"Consequently, the Federal Reserve's accommodative monetary policies, by providing support for demand and for the recovery, should help, over time, to reduce long-term unemployment as well," he said.

"To the extent that this reversal has been completed, further significant improvements in the unemployment rate will probably require a more-rapid expansion of production and demand from consumers and businesses, a process that can be supported by continued accommodative policies," Mr Bernanke said.

But he knows the jobs problem has a long way to go before being repaired.

"After nearly two years of job gains, private payroll employment remains more than 5 million jobs below its previous peak; the jobs shortfall is even larger, of course, when increases in the size of the labor force are taken into account," he said in his speech on Monday.

"And the unemployment rate in February was still roughly 3 percentage points above its average over the 20 years preceding the recession.

"Moreover, a significant portion of the improvement in the labor market has reflected a decline in layoffs rather than an increase in hiring."

The problem remains difficult and enduring, but every little bit of growth makes a difference.

For example, US data this week showed a solid rise in durable goods orders last month and another fall in US house prices, according to the latest Case Schiller housing index.

The fall in prices in January though was at a slower pace than in December, which analysts saw as another small indicator that the depression in housing had levelled off.

Inflation remains weak, even with the recent rise in oil and petrol prices, although that could crimp the economy mid-year if the increases continue (as they did in 2008).

That's why there was talk this week of a coordinated release of oil reserves by the US and other countries and why Saudi Arabia has lifted output to 10 million barrels a day.