Issue of the week: The economy shows some muscle

last updated 10 January 2015

This is starting to look like a real recovery, said the Richmond, Va., Times-Dispatch in an editorial. Last week brought a spate of positive economic news, including a 3.1 percent rise in the fourth-quarter gross domestic product, up from 2.6 percent in the preceding three months. We also saw consumer spending increase by 0.7 percent, powered in part by slightly higher personal incomes. And the unemployment rate dropped to 8.9 percent as employers added 192,000 jobs. These are foundations on which “a healthy and prolonged economic expansion” can be built. Maybe, but “troubling signals” are emanating from the housing market, said John Schoen in MSNBC.com. Home prices, as reflected in a 20-city composite assembled by consultants Case-Shiller, fell a full percentage point from December to January alone, and sales of new homes have slowed to their lowest levels in 50 years. Although the recent run of positive reports is encouraging, “a double dip in housing could put the wider economic rebound at risk.”

Especially if “unrest spreads to one or both of the Middle East’s biggest oil producers,” said Mark Zandi in Economy.com. Iran and Saudi Arabia have staved off chaos until now, but “it is not hard to construct darker scenarios” in which oil shoots back up to its previous high of about $150 a barrel. “Nothing is harder on the U.S. economy than rising oil prices,” and if they go that high, the U.S. will tumble back into recession. Not necessarily, said Donald Luskin in The Wall Street Journal. “We’re conditioned” by the oil-price shocks of the 1970s and early 1980s to “assume that any rise in oil prices is bad for growth.” But the economy continued to grow steadily in the mid-2000s, even as oil prices kept climbing. And though prices neared $150 in mid-2008, it was the fall of Lehman Brothers, not the rise of oil, that kicked the 2008 financial crisis into overdrive. As long as the price increases aren’t extraordinarily sharp or steep, the recovery should remain on course.

Employers appear likely to keep hiring, said Steve Goldstein in MarketWatch.com. Two indicators in particular give reason for hope. The four-week rolling average of first-time unemployment claims has fallen to its lowest level since 2008, and there have been fewer than 400,000 filings in five of the past seven weeks. And the U.S. Treasury reports modest gains in the amount of money it’s collecting in withheld-income and payroll taxes. That can only mean that firms are hiring. “Clearly, Treasury can’t collect if people don’t work.”