Yesterday’s Institute for Supply Management’s survey of manufacturers for January delivered a strong dose of optimism for thinking that the expansion has a head of steam. As an early look at how the economy fared last month, this index’s rise to its highest level in seven years signals that the growth is still bubbling in the new year. The U.S. stock market took the hint and posted a strong rally yesterday. In fact, equities have more or less regained all the losses suffered during the Great Recession.

“Overall, this [manufacturing] report ranks among the strongest signs to date that the economy is moving into a phase of stronger sustainable growth,” says David Resler, economist at Nomura Securities, via the LA Times. Looking at the recent trend in the ISM Index (see chart below), it’s hard to argue.

“The economy is growing and it’s getting a little more momentum now,” Treasury Secretary Geithner says in an interview this week. “We’re seeing exports stronger, private investment is stronger, you’re seeing manufacturing come back, the agricultural economy is very strong now, the strongest it’s been in a long period of time.”
The rebound in January’s ISM Manufacturing Index has had corroboration of a degree in recent economic reports, including December’s rise in consumer spending and income and the increase in fourth quarter GDP to a new high.
Stepping back and reviewing the revival of macro fortunes in recent months after last summer’s stumble inspires some economists to explain the shift to growth are partly if not largely linked with the Fed’s second round of quantitative easing that was anticipated last fall and was formally announced in November. “We’ll need a few months more data, but so far it looks like the recovery is going from almost nonexistent during May through August, to moderate. That’s progress,” writes economist Scott Sumner, who’s argued long and hard in favor of monetary stimulus as the primary weapon in fighting economic contraction and disinflation/deflation.
And Bill Woolsey notes:

The estimate for Final Sales of Domestic Product for the fourth quarter of 2010 was $14,865 billion. This was a 7 percent increase from the third quarter. Since the sharp decrease in the 4th quarter of 2008, this is the first increase that was greater than the 5 percent trend of the Great Moderation. In fact, it was the first increase that wasn’t less than 3 percent.

Meanwhile, the IMF suggests that there are no free lunches. Stimulus today, pay the bill tomorrow? Perhaps. As the IMF’s Carlo Cottarelli reports:

The United States and Japan are delaying their earlier plans to reduce their public deficits, choosing instead to provide further support to their economies. The change in plans is even more remarkable if you look at the cyclically adjusted balance… Some of the change in the fiscal stance with respect to our earlier projections is attributable to the somewhat better than projected fiscal results in 2010… Most of it, however, is due to additional stimulus measures introduced during the last two months. These two countries need to strengthen their fiscal adjustment credentials by detailing the measures they will adopt to lower deficits and debt over the medium term.

Many disagree on QE2’s influence in the current round of recovery, but even if you buy this argument the narrative is far from flawless. The main challenge remains the weak job growth. GDP, manufacturing and the stock market may have regained lost ground, but the labor market is still struggling and on some levels has shown precious little improvement from the depths of the previous contraction. Indeed, the 9.4% jobless rate in December is only slightly below the cyclical peak of 10.1% reached in October 2009 and a world away from the below-5% days that prevailed before 2008 (see chart below).

The persistence of high unemployment is a symptom of the weak pace of net job creation. December’s modest increase in private payrolls reflects a trend that’s been harassing the economy for much of the time since the recession was formally declared over as of June 2009.
The January update on payrolls arrives this Friday. The consensus forecast calls for a net rise of 163,000, which would be an improvement over December’s 113,000 gain. But as most economists note, materially higher and sustained levels of job growth are needed to lower the high unemployment rate. For the moment, we’re just not there yet, and by some accounts the odds don’t look encouraging for anticipating a substantial improvement anytime soon.
Some argue that the nature of the problem this time is structurally high unemployment, meaning that the problem won’t be solved with an economic recovery per se because there are deeper problems, such as a mismatch between employee skills and what’s needed by corporate America. If true, the high jobless rate could persist for longer than usual.
Even if the jobless problem isn’t structural, a quick fix may not be imminent. Economist Murat Tasci of the Cleveland Fed explains that high unemployment is cyclical rather than structural, but he still thinks that the jobless rate will fall slowly.
So, yes, the economy is effectively back on track in terms of the recovery that was in force before it was derailed in the spring and summer of 2010. But in terms of employment, not much has changed. Job growth is still challenged, and ultimately that raises doubts about the strength of the economic recovery.
In fact, the anxiety tied to unemployment is global. According to a new Ipsos/Reuters poll, the leading concern of adults surveyed in 24 countries around the world is joblessness, poverty and social injustice.
The more things change…