The latest U.S. economic indicators have taken a favorable turn.
A variety of data suggest an improving labor market. For example, new claims for unemployment insurance continue to exhibit a steady decline.
And on Friday the Bureau of Labor Statistics reported that seasonally adjusted nonfarm payroll employment increased by 200,000 in December, bringing the average monthly gain for the year to 136,000. The December strength was confirmed by estimates of an increase of 176,000 jobs reported by the separate BLS survey of households and 325,000 according to ADP’s direct payroll calculations. Even so, we’d need 30 more months just like December to get the number of workers on nonfarm payrolls back up to where it was on January 2008, let alone to catch up with population growth over what by then would have been 6-1/2 years.
One of the surprising things about 2011 was that the unemployment rate has now fallen by 1.5 percentage points from its peak, despite the relatively weak growth in employment and GDP since the recession ended. The key explanation appears to be a declining labor force participation rate, which can’t be read as an encouraging development.
The PMI based on the ISM survey of manufacturers rose to 53.9 in December. A value above 50 indicates overall economic expansion. The December reading is the best in the second half of 2011 and slightly above the long-term historical average of 52.7. But again, one would hope to see better than that given how much below capacity we’ve been.
Auto sales also continue at levels well above the recession lows but well below what we used to consider normal.
Overall, U.S. economic growth appears to have picked up over the last few months. But while Tim Duy acknowledges the positive incoming data, he nonetheless still worries about a possible repeat of this summer’s U.S. budget fiasco and the separate financial situation in Europe. On the latter, borrowing costs for Italy are once again back up to levels at which their budget deficits are likely unsustainable.
The spread between 3-month and overnight interbank euro borrowing rates remains elevated, another indicator that concerns about the soundness of European banks have not gone away.
To Tim’s worries I would add possible disruptions in world oil supplies. If sanctions on Iran’s oil sales prove to be successful, that would of course increase oil prices for buyers as well as raise the risk of escalation into military conflict. And even if Iranian production and Middle East shipments remain unaffected, the situation in other important oil-producing countries such as Kazakhstan ,  or Nigeria could easily become more unstable.
So for now the rocky U.S. economic recovery continues, but there are storm clouds on the horizon.