Economic Outlook: Recovery -- a new puzzle

By ANTHONY HALL, United Press International  |  Jan. 28, 2013 at 10:28 AM
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Durable goods orders rose in December, equities look poised for an upbeat day in New York and benchmark treasury bond yields rose above 2 percent early Monday.

The unemployment rate was 7.8 percent as of December and annual inflation at 1.4 percent as of November.

Those final two figures point to a steady strategy at the U.S. Federal Reserve, where policymakers have set their sights on 6.5 percent unemployment as the threshold for a potential refund rate increase. There is also a longstanding goal of keeping inflation below 2 percent, which means the Fed is well within its comfort zone for an accommodative policy. It has been nine months since 10-year benchmark treasury bond yields topped 2 percent.

For that matter, the Dow Jones industrial average and the Standard & Poor's 500 are both above five-year highs and they are there almost in spite of a week of positive economic data -- that said because corporate reports, not economic data, have provided most of the recent push.

The data haven't hurt. The Commerce Department said Friday sales of new single-family homes rose 19.9 percent in 2012 over 2011, despite a slip November to December. The Conference Board said the U.S. Leading Economic Index rose "sharply," with a gain of 0.5 percent in December. Markit Economics added to the forward momentum, as the Purchasing Managers Index hit 56.1 in January from 54 in December, calling that "the strongest expansion since March 2011."

Moreover, the Labor Department said first-time unemployment benefit claims dropped by 5,000 for the week -- and by 42,000 over two weeks -- dropping the weekly toll to 330,000, a figure unseen for more than five years.

Does anyone notice a persistent shrill sound in the background? If not, it's likely that it will become noticeable soon as inflation hawks begin to swarm around the Federal Reserve calling for tighter monetary policies.

An interesting point revolves around the 6.5 percent unemployment figure, which the Fed has said represents the threshold for tighter policies.

For example, what if the unemployment rate falls further and that attracts discouraged workers back into the workforce? All things being equal, 6.5 percent is a false summit. The figure could hit 6.5 percent, which would entice discouraged workers back into the workforce, which would push the unemployment rate higher. Recovery is not apt to be linear, when it occurs.

On the other hand, the unemployment rate has been drooping largely because of the number of people leaving the workforce -- as opposed to a drop because of more jobs.

In theory, the unemployment rate could fall to 6.5 percent without any more jobs added to the economy at all -- just on the backs of people giving up. The Fed would then tighten monetary policy for completely unintentional reasons.

Like climbing a mountain, there is more peril in the descent than the ascent. For the Fed, managing a decline is relatively easy compared to managing a recovery.

In international markets Monday, the Nikkei 225 index in Japan slipped 0.94 percent and the Shanghai composite index in China gained 2.41 percent. The Hang Seng index in Hong Kong added 0.39 percent and the Sensex in India fell less than 0.01 percent.

The S&P/ASX 200 in Australia gained 0.52 percent.

In midday trading in Europe, the FTSE 100 index in Britain climbed 0.36 percent while the DAX 30 in Germany was off 0.08 percent. The CAC 40 in France added 0.25 percent and the Stoxx Europe 600 rose 0.05 percent.

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