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Wed November 30, 2011
Stocks Soar, But How Strong Is The Economy?
The U.S. economy is experiencing its strongest across-the-board growth of the year, as private companies hire more people, some manufacturers expand and the stock market surges on a plan to ease Europe's financial crisis. The Dow Jones industrial average gained 490 points Wednesday, an increase of more than 4 percent.
But analysts say the economy isn't growing robustly enough to lower unemployment, stem government layoffs or revive a housing market that remains extremely weak.
Wednesday delivered a number of hopeful developments, particularly in the job market, where private-sector hiring is up — posting its highest growth of 2011 — and layoffs are down.
"We haven't had a lot of unexpectedly good news," Mark Vitner, senior economist at Wells Fargo, said. "Maybe it's a bit of a Santa Claus rally."
One important indicator, the ADP National Employment Report, found that privately owned businesses far exceeded expectations by adding 206,000 jobs in November. Many economists had predicted an increase of just 130,000 jobs, the same total added to payrolls in October.
The report, from Automatic Data Processing Inc. and the consultancy Macroeconomic Advisers, is widely regarded as a gauge for the federal government's monthly employment report, to be released on Friday. While the ADP report counts only private-sector jobs, the government's Bureau of Labor Statistics release will tally the beleaguered government sector.
Fewer Layoffs Expected
In addition, planned layoffs among U.S. employers dropped slightly. A report by the outplacement firm of Challenger, Gray & Christmas shows that companies announced 42,474 layoffs in November — down 0.7 percent from a month ago and 13 percent from the year earlier.
Another key indicator, Chicago-area manufacturing activity, rose above expectations for November. That production gauge increased to a seven-month high, and new customer orders rose to their highest level since March. Analysts say the data indicate that Midwest-based manufacturers are expanding despite a lack of demand from Europe, thanks to surging demand among U.S. energy companies ramping up exploration for oil and natural gas.
And, finally, an upturn in real estate: Pending home sales for October jumped 10.4 percent, the highest level of the year.
"I think this is more than a flash in the pan," Mariman Behravesh, chief economist for IHS Global Insight, said of the developments. "I don't think we're looking at the economy booming, but, then again, the risks of a double-dip recession seem to have gone away."
Help For Europe Cheers Markets
U.S. stocks rallied Wednesday morning in reaction to a decision by the Federal Reserve, European Central Bank and central banks in Britain, Switzerland, Canada and Japan to collaboratively help ease Europe's financial problems. The central banks agreed to infuse European banks with low-interest cash loans, mostly in dollars.
The intervention is aimed at addressing a tightening credit market in Europe, driven partly by investors — worried about the stability of the European Union — selling off their euro-based assets and buying up dollar-based assets.
The blue-chip stocks on the Dow Jones industrial average soared by 490 points, or 4.2 percent. The Standard & Poor's 500 index jumped 51 points, or 4.3 percent. And the technology-oriented Nasdaq Composite index rose nearly 105 points, or 4.2 percent.
Holiday Sales Start Strong
This all comes after consumers opened their pocketbooks and did their part for the economy this past weekend. From Black Friday, the heavily hyped day-after-Thanksgiving shopping fest, to Cyber Monday, customers spent $52 billion, up 9 percent from the year earlier, according to the National Retail Federation.
And the $1.25 billion in online sales on Cyber Monday was the biggest day for Internet commerce in history, according to research firm comScore Inc.
Once the holiday shopping craze ends, though, the economy still faces strong headwinds. Economists widely expect the strong seasonal spending to boost economic growth to a 3 percent annual pace for the fourth quarter, followed by a slowing in early 2012 to below 2 percent.
In the job market, stronger private-sector hiring is expected to be offset by continued cuts at all levels of government. Many economists anticipate Friday's employment report to reveal a gain of roughly 125,000 jobs for November — not enough to cut the nation's 9 percent jobless rate.
Government Job Cuts Hurt
The government sector has announced 180,881 job cuts this year, more than three times the number of cuts in the financial sector, the Challenger report shows.
The situation for government workers is expected to eventually worsen owing to the failure of Congress' supercommittee to agree on a debt-reduction plan. As a result, some $1.2 trillion in automatic spending cuts will kick in starting in fiscal 2013, with half of them to be made in domestic programs and half in defense spending.
Another bad omen: Personal income increased $48.1 billion, or 0.4 percent, in October, not nearly enough to keep pace with inflation. All the while, Americans are dipping more deeply into their savings.
No Sign Of Housing Recovery
And the housing market remains deeply troubled, despite the October sales growth. National home prices in the third quarter, ended Sept. 30, showed virtually no increase from the previous quarter, according to the Standard & Poor's/Case-Shiller index. Prices in most big cities, including those hard hit by the mortgage collapse, declined.
While the help for Europe has delivered a short-term boon, Vitner said the crisis eventually will affect the U.S. He said Europe's weak demand for exports will cause American-based companies with operations in Europe to scale back hiring.
"We're just kind of bumping from crisis to crisis," he said. "We get past one and there seems to be a little bit of relief, and then there seems to be another one lurking around the corner."