Is Momentum Building for an Economic Recovery?

You wallet may not be expanding, but the economy is.

A series of economic reports out Friday tell us that while labor costs remain at historic lows, momentum is building on several fronts for an economic recovery this year.

Both consumer sentiment and gross domestic product beat expectations today, as did the producer’s manufacturing index from Chicago. The news out of Chicago showed rapidly increasing new orders, and even better, that production was struggling to keep pace. The result: a strong boost in hiring in January. January was the fourth straight month of accelerating new orders for the Chicago PMI.

Other business activity in the GDP equation also showed signs of strengthening. Increases in fixed investments by businesses last quarter, particularly in equipment and software, suggest that businesses are gearing up for an accelerating pace of new orders and activity. And although consumer big-money purchases were down (likely affected by the end of the “cash for clunkers” program), purchases for nondurable goods and services increased.

Inventories, which grew last quarter and boosted GDP to an unexpected 5.7 percent, were a bit of a downer in the report. More importantly, however, real final sales (GDP less change in inventories) increased 2.2 percent compared to an increase of 1.5 percent for the third quarter 2009.

All things considered, these factors point to increases in production in the months ahead.

Last but not least, consumer sentiment improved to 74.4 in January compared to a mid-month reading of 72.8 and a reading of 72.5 for December. Consumer expectations were most improved, showing a 2.6 rise for the end of the month. Whether we can thank Senator Brown’s surprise upset in Massachusetts or the new messages coming out of Washington, any change in the zeitgeist is a welcome change and bodes well for improving economic conditions.

Consumers spending and employment remain the wild cards in the equation. But the news looks upbeat from here.

Sources:

GDP for Q4-09 (US Dept of Commerce)

Chicago PMI (Institute of Supply Management – Chicago)

Consumer Sentiment (University of Michigan/Reuters)