President Obama finally gets the message. The recovery, at this point, is all about jobs. He made that a central theme in his State of the Union address and outlined a number of proposals, mainly tax incentives, to help small businesses start hiring again.
Most of the proposals are not new, and many have been languishing in Congress almost since he took office; political gridlock seems to be the order of the day in Washington. But there is still reason to be optimistic about the coming year.
I noted in my column last week that the economy was far from out of the woods. I cited a number of reasons for my pessimistic view of the coming year. But there are also reasons to believe the recovery will stay on track, and I want to address those, as well.
A number of economists, for example, are forecasting a rebound in consumer and business spending regardless of actions by the administration or Congress. And that’s what the nation needs most right now.
Although much of the media attention has been focused on the decline in consumer spending as people lost jobs and saw the value of their homes plummet, the real decline was in business spending.
Companies spent most of 2008 and 2009 slashing jobs, travel, and entertainment budgets; freezing salaries; and delaying investments in research, manufacturing capacity, and technology upgrades to maintain profits. But the latest quarterly results and company comments suggests the cycle is changing, according to an informal survey by The Wall Street Journal.
There are some positive signs. Continental Airlines reported that business travel is making a slow comeback. Seagate, which sells hard drives used in PCs and servers, posted double-digit growth for the second quarter in a row. And, the corporate services unit of American Express, which deals with corporate customers, posted 13 percent growth in December.
Meanwhile, the National Retail Federation is forecasting a 2.5 percent increase in sales this year because of improved consumer confidence. Last year, sales declined by the same amount.
The Washington-based trade group also noted that the housing market and employment numbers are starting to show positive signs. Consumer spending will lag behind overall economic growth, but will expand by 2 percent to 2.5 percent, the group said.
“While we still expect shoppers to continue to be frugal with their discretionary spending, retailers will soon be able to reap the benefits of leaner, smarter inventories and a year and a half of pent-up consumer demand,” said NRF’s chief economist, Rosalind Wells.
Consumers are also feeling less pressured by bills and debt. In a survey this month by America’s Research Group and banking giant UBS, 23 percent of those polled said they had curbed spending because of bills and debt, down from 33.2 percent last year.
The percentage of consumers who said they feel safer in their jobs also rose, to 69.4 percent compared with 54.7 percent in November. And, the percentage of consumers who said they bought merchandise at regular prices instead of sale prices rose to 15.5 percent from 4.8 percent in 2008.
“Consumers are beginning to loosen up their wallets with incremental discretionary spending likely driven by a sense that the worst of the economic downturn is over, yet consumers seemingly remain very disciplined in their shopping behavior,” UBS said in the report.
Surprisingly, exports, which were highlighted in the president’s address, are also aiding the recovery. The sharp decline in the value of the dollar over the past two years has made U.S. goods cheaper and more competitive overseas.
The nation’s businesses exported about $1.4 trillion worth of goods and services during the first 11 months of 2009. The year before, the U.S. was the No. 3 exporter worldwide, behind Germany and China, according to government reports.
U.S. exports rebounded at almost an 18 percent annual growth rate in the third quarter. “Exports are now 25 percent to 30 percent of U.S. manufacturing shipments, a record high. They are growing twice as fast as the global average,” Joseph Carson, chief economist at AllianceBernstein Investments, said in a recent interview with CNN.
Many economists are also predicting a snapback, or “bullwhip” effect in business inventories, which should also aid growth in the coming year. The phenomenon occurs at the end of a recession, during which businesses have slashed inventories. Even slight increases in demand can spur businesses to restock shelves.
For example, industrial bellwether Caterpillar Inc., which makes large industrial machinery, recently announced plans to more than double its steel purchases this year, as well as increased orders for other parts and supplies. “The inventory burn-off is over,” Caterpillar CEO Jim Owens told the Journal.
On Friday, the government releases its initial reading on gross domestic product for the fourth quarter. The GDP is expected to have risen at an annualized rate of 4.5 percent during the final three months of 2009, further evidence of the inventory snapback.
Although economists say the snapback will provide only a temporary boost for the economy, it will help prime the pump. Coupled with government incentives, it should move the recovery forward.
The administration’s job plans center on tax incentives for small businesses. Obama proposed cutting levies on small businesses so they can invest more in their firms, hire more workers, and raise the wages of existing employees. He also wants to use $30 billion of leftover bank bailout funds to encourage community banks to lend more to small companies.
All of these initiatives will help, but Congress must act quickly. The political landscape has changed significantly with the election in Massachusetts of Republican Scott Brown. Democrats no longer have a 60-vote, filibuster-proof majority in the Senate, and that means Republicans can block any legislative proposal.
The president urged a bipartisan approach to his jobs package, but do Republicans really want to work with him? No House Republican voted for the president’s stimulus package last year, and Senate Republicans have unanimously opposed health care reform.
The last thing the nation needs is political gridlock in the nation’s capital. Businesses are starting to do their part; now lawmakers need to do theirs.