A very good week

The American economy

by G.I. | WASHINGTON

PERHAPS it's time to dial back some of the gloom. This week gave us positive news on two fronts. First, the underlying American economy seems to be in reasonably good shape. Second, the biggest risks hanging over the economy—policy errors in America and Europe—receded just a bit. It is not time to declare the all clear. This recovery, having disappointed so many times before, probably will again at some point.


But for now, let's look at  the positive case. America's Bureau of Labour Statistics reported today that non-farm employment grew 120,000 in November from October and the unemployment rate plunged to 8.6% from 9%, its lowest level since the latter stages of the recession in early 2009. The job growth was a tad below the Wall-Street consensus of 125,000 and well short of what the ADP survey on Wednesday had hinted. But the BLS also revised up previous months: non-farm employment grew 100,000 instead of 80,000 in October, and it advanced a whopping 210,000 in September, up from the previous estimate of 158,000. The fact that revisions lately have been positive is suggestive of an economy re-acclerating from its summer swoon.
Not surprisingly, government employment remains a drag: it fell 20,000, while private payrolls advanced 140,000. Within the private sector, manufacturing was flat and construction declined. Retail was up sharply, by 50,000, which suggests retailers are anticipating a robust holiday season.
The drop in the unemployment rate was welcome, but a bit deceptive. America's employment report is based on two separate surveys: one of employer payrolls, which yielded the 120,000 gain; and a separate one of households, according to which employment rose 278,000. It's the latter survey that's used to determine the unemployment rate. The unemployment rate declined not just because of this strong employment growth but because the number of people looking for work declined: the labour force contracted and as a share of the working age population (the participation rate), it fell to a disturbingly low 64%. That we have not seen the unemployed flood back into the labour force in response to better economic data is troubling, but should not overshadow the overall picture of health.
Today's report is no anomaly; it comes on the heels of a run of good data that suggests the American economy so far is defying the recessionary tug from Europe. The survey of  purchasing managers point to an expanding factory sector, pending home sales are picking up, and anecdotal evidence points to a strong start to holiday shopping.
What's behind this? I think the best explanation is that a decent recovery would have begun a year ago but for a run of bad luck: the Japanese earthquake and tsunami, the run up in oil prices following the Arab Spring, and the political brinkmanshp in America over the debt ceiling and in Europe over its sovereign-debt crisis.
If we can avoid similar pitfalls in the coming 12 months, there's a decent chance the economy can hold on to its current momentum: enough for a year of 2.5%, even 3% growth, but not enough for a barnburner; there is still too much public and private deleveraging to go. What could interfere with this scenario? As usual, the problem is politics. America is facing automatic fiscal tightening in January unless several stimulus measures, including a 2% payroll-tax cut and extended unemployment insurance benefits are extended. There's good news on that front. Though Republicans blocked Senate Democrats on Thursday from passing an expanded version of the payroll-tax cut, they have signaled a willingness to pass some version of it eventually, as long as it's not paid for by raising taxes on millionaires. The administration continues to make rhetorical hay out of the Republicans' positions, but officials have carefully left the door open to a compromise: either allowing the deficit to rise in the short term or paying for it with relatively innocuous measures such as selling radio spectrum. Even resolving that will leave some austerity in the pipeline, but it's manageable.
Europe remains a bigger problem. There again the news has turned positive this week. Political leaders have begun exploring moves towards tighter fiscal union and budget monitoring that doesn't require the cumbersome process of having every member of the euro zone approve a treaty change. On Thursday Mario Draghi, the European Central Bank president, signaled support for that path and tantalised markets with the prospect that "other elements might follow"—taken as a euphemism for more aggressive bond buying. Peripheral bond yields have come down sharply this week in response.
This is all very encouraging, but must all be taken with plenty of caution. Politicians on both sides of the Atlantic have too often said they would pursue the necessary actions, but failed to ovecome their profound philosophical differences on how to get there. The meeting of European Union leaders on December 9th is critical. Until then, enjoy your weekend for a change.