April 30, 2012
The first quarter of 2012 brought
a welcome surge in global equity markets, giving investors hope that the
lingering effects of the recession that ended officially in 2009 might finally
be waning. The Federal Reserve reiterated its expectation that inflation would
remain under control at least through 2014, yet acknowledged that recent
improvements in the economic outlook could make a third round of quantitative
easing unnecessary. Europe, meanwhile, performed first aid on its sovereign
debt issues, lowering interest rates and infusing capital into the European
banking system. Overall, caution is still the operative word; however, good
news on the jobs front and rising consumer spending are beginning to bring
optimism into the conversation as well.
Concerns about Europe’s debt
crisis and the health of the U.S. recovery were swiftly addressed in the first
quarter, easing immediate fears and helping fuel the stock market surge. The
Fed’s commitment to keep interest rates low and the European Central Bank’s
show of support for Europe’s banking system were positive factors. The U.S.
savings rate increased slightly to 4.5% as companies and individual investors
continued to reduce debt levels and real disposable income edged up 1.4%. And
although foreclosures kept housing prices relatively soft and continued credit
restrictions dampened buyers’ enthusiasm, the real estate market showed some
tentative improvement. Following increases in GDP growth, consumer spending,
and car sales in the fourth quarter of 2011, a mood of cautious optimism about
prospects for 2012 has begun to spread.
Driven by consumer spending,
rising exports, and non-residential fixed investment, real gross domestic
product, the widest gauge of U.S. economic strength, increased at an annual
rate of 3% during last year’s fourth quarter according to the latest update of
government statistics. That’s almost double the 1.8% third quarter rate and the
1.7% rate for 2011 as a whole. Although the Fed has predicted that growth will
have slowed to 2% in the first quarter—and that high oil and gas prices may
indeed temporarily increase the inflation rate—further gains may come later in
the year as the unemployment rate continues a slow decline.
The job market continued to
improve during the first quarter, though the strong employment gains that
occurred in December, January, and February did not continue into March, when
just 120,000 jobs were added, well short of the predicted 205,000. As a result,
the unemployment rate declined a mere 0.3% to 8.2%. New positions were created
in manufacturing, food services and bars, and healthcare, while retail jobs
lagged and federal employment was flat.
Though sticker shock at the gas
pump makes it feel as though consumer prices have been surging, there’s little
indication that overall inflation is staging a comeback. Consumer spending is
rising, helped by wages that rose 3.1% through the 12 months that ended in
February, and that could begin to put upward pressure on prices. Yet the Fed
continues to predict inflation will be contained, and despite a 0.4% rise in
the Consumer Price Index in February, annual inflation remained at a moderate
Going forward, much depends on
Europe, which is likely already in a recession. A smaller-than-expected retreat
there could help global markets, while a harsher downturn could have the
opposite effect. Meanwhile, everyone is waiting to see whether the recent
positive signs in the U.S. economy will result in measurable improvements in
GDP growth without also increasing inflationary pressures. Stagnant U.S.
corporate earnings could be a problem, as could any slowdown in China. Yet all
in all, it seems reasonable to hope that the U.S. recovery will continue to
gain ground as the year unfolds.