The U.S. economy: recovery or slowdown? It still comes down to a four letter word: JOBS

Posted on February 8, 2012

U.S. consumer confidence unexpectedly declined in January. The New York based Conference Board reported on January 30th that the confidence index fell from 64.8 to 61.1 exceeding even the most pessimistic forecast. Some economists were actually projecting an increase to 68.0. Americans are worried about their job status, income, rising food and gas prices, and the prolonged weakness in the housing market. Home prices continue to deteriorate, having fallen for the third straight month in all regions of the country.

The United States is a consumer driven economy. With a lack of secure buyers, the growth of the economy falters. Without faith in the growth of employment, U.S consumers are reigning in their spending.  The anxiety of becoming unemployed has stalled spending in December, the most productive sales month of the year. Purchases were basically unchanged from November. The paradox that income rose 0.5% from November to December (the most in 9 months), begs the question, where did the money go?  In December, rather than consume more goods, and increase sales, and hopefully encourage employers to hire more workers, American consumers held back, ultimately saving all their increased income. The concern that additional income improvements will go into savings raises the apprehension that businesses will pull back on hiring and thus slow the economy. Consumer spending accounts for approximately 70% of U.S. economic activity. The government reported last Friday that the economy grew at an annual rate of just 1.7% last year-roughly half the growth of 2010. The weakest showing since the economy contracted in 2009.

Business added 170,000 workers in January. This increase was less than predicted and followed a revision of the prior month that was lower than previously reported. The unease about the high number of jobless Americans is one of the reasons that the Federal Reserve recently announced maintaining its lending rate near zero. It’s a “Catch-22”.  More hiring is needed to stimulate consumer spending and more consumer spending is needed to encourage more hiring.

It is a strange foreign exchange phenomenon. As the U.S. economy gets stronger, confidence and bravado returns to the financial markets motivating investment and movement of capital to other markets around the world.  Consequently, the U.S. dollar gets weaker. When there are indications of global slowdowns, regional recessions, and economic uncertainties (including the US), international investments pull back and the U.S. dollar is the primary recipient of these anxieties.

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