US Economic Outlook: October Update

So, where is the economy headed at this point. As best we can tell, it's still headed upward--yet the recovery remains fragile at this stage. Here is what Economy.com is saying at this point in their macroeconomic update.

The most likely economic scenario is that the recent revival in demand and production will induce businesses to soon resume hiring. Yes, that's waht we've been waiting for! The current fragile recovery will then evolve into a sustainable rebound. This scenario is increasingly at risk, however, as businesses are surprisingly reluctant to expand their operations. If businesses do not begin to add to their job roles before the year is out, then next year’s economic outlook will quickly darken.

Demand and production have rebounded strongly in recent months. Real GDP is expected to post a robust over 5% annualized gain in the just ended third quarter and 4% during the second half of the year. This is a positive sign. Retailing, vehicle sales, and home sales have also strengthened as this year has progressed. This will last as long as their are jobs and income to pay for these consumer purchases. Production has rebounded in response, as is clear from much stronger manufacturing activity.

Businesses are also enjoying better profits and balance sheets. Total corporate profits are rising at a double-digit pace and are nearly back to their pre-recession peaks. Corporate debt loads are falling and new corporate borrowing has nearly come to a standstill.

Stronger demand and production combined with better profits, and balance sheets are expected to soon induce businesses to shift their focus from cost-cutting to expanding revenues. This should be evident in greater advertising and travel, expanded investment, and ultimately hiring. The rising jobs and incomes will reinforce demand, and the economy will be off and running. Indeed, advertising, travel, and investment have all seemingly improved a bit recently.

The job market continues to founder, however, and this is the most substantive and growing threat to the sanguine, most-likely economic outlook. Leading indicators of job growth for the most part are still discouraging. Help-wanted, manufacturing hours, the proportion of respondents to the Conference Board’s consumer confidence survey that believe jobs are hard to get, and initial and continuing claims do not suggest an imminent substantive rebound in jobs.

Without job growth, the recent revival in demand and production will fade early next year when the benefits of tax cutting and mortgage borrowing will wane. Adding to the concern is that policymakers have few tools left at their disposal to lift the economy. With the federal funds rate at 1%, the Federal Reserve has very little room to maneuver, and with a budget deficit that is approaching half a trillion dollars, fiscal policymakers are also largely hamstrung.

And, that's the economic word for now.

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