US Economy Improving Faster Than Expected, Data Show

(Tribune Washington Bureau MCT) -

Piece by piece, evidence has begun to accumulate showing that after four years of lackluster performance, the U.S. economy is on track for stronger growth than many people had expected.

The latest support for that view comes from data on consumer spending, which grew at a surprisingly quick pace in February, pushed upward by robust demand for cars and building materials.

The report this week from the Commerce Department came just a few days after employment figures showed faster improvement than most economists had projected, in large part because of the strong rebound of the market for housing. A measure of first-time unemployment claims fell to a five-year low last week.

The Great Recession of 2007-08, the steepest downturn since the 1930’s, has been followed by a slow and bumpy recovery. Economists have been divided on whether growth eventually would accelerate.

The more optimistic among them have forecast that the economy would begin to accelerate once consumers and companies worked through the damage left behind by the housing bubble and debt crisis that triggered the recession. That process of “de-leveraging” has now largely run its course, and the new evidence may suggest faster growth in the coming months.

“What’s changed in the economy is that the key cyclical drivers of economic growth are kicking in,” said Wells Fargo Securities economist Mark Vitner, noting the gains in the automobile and housing markets. “We are further along the recovery process than many people realize.”

Other economists remained cautious, fearing that reductions in spending by the federal government, which began to take effect this month, will slow the economy and job growth in the spring and summer.

The key question, said Kathy Bostjancic, an economist at the Conference Board, “is whether the momentum from the housing market” can “offset the negative drag from budget cuts.”

But so far, consumer spending, which accounts for about 70 percent of U.S. economic activity, has proved very resilient.

The 1.1 percent jump in retail sales last month from January was the most in five months and double analysts’ average expectations. Although higher pump prices for gasoline accounted for a part of that increase, sales also surged at car dealerships, home-improvement stores and internet retailers.

“The fact that consumer spending hasn’t slowed yet is definitely good news,” said Ben Herzon, an economist at the forecasting firm Macroeconomic Advisers, one of several forecasting firms that have raised their projections for economic growth this quarter.

Economists pointed to a variety of factors for the robust spending in February, including a possible surge in income tax refunds and larger-than-known support from the underground cash economy, which tends to flourish during hard economic times.

Moreover, pent-up demand, super-low interest rates and some easing of credit by lenders have helped drive up sales of housing and autos, which are important for manufacturing and service businesses.

“Consumers have refinanced, defaulted or restructured mortgage debt and paid down installment debt,” said Daniel Meckstroth, chief economist at Manufacturers Alliance for Productivity and Innovation. “Households have the capacity to use more credit, and loans are available for creditworthy households.”

His group predicted Thursday that 16 of 24 major industries would grow this year, with that number rising to 23 industries next year, led by housing.

Consumer confidence is also improving as stock prices have soared and home prices have finally begun to climb across the country.

When consumers feel wealthier, they tend to spend more, and in recent months, consumer wealth has moved up. Using data from the Federal Reserve and other sources, Mark Zandi, chief economist at Moody’s Analytics, estimated that total household net worth – assets minus debts – was up by $16.6 trillion to a record high at the end of February.

Wealth hit a low point in the spring of 2009. Even if the “wealth effect” amounted to just a penny or two per dollar, Zandi said, “it’s still a lot of consumer spending, a lot of economic activity.”

Companies have also become more optimistic in their outlook.

In a new survey released Wednesday, the Business Roundtable said 72 percent of its member chief executives polled in the first quarter expected sales to increase in the next six months, up from 58 percent in the fourth quarter. Nearly four out of 10 said they planned to increase capital investment as well, compared with 30 percent previously.

“Housing has clearly reached a bottom, prices are beginning to go up, employment is beginning to be added in construction jobs,” said the group’s chairman, Boeing Co. Chief Executive Jim McNerney.