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MONEY

Why is the Economy Doing So Well?

People and businesses are buying stuff again, which is just what has to happen for a healthy recovery. Unfortunately, it's not all that has to happen.

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Did the economic spring arrive in December? Last month saw a bumper crop of positive economic signs – manufacturing, car sales, new jobs, retail sales and unemployment — all took turns for the better. While some of these figures will yield a good harvest, there are a few weeds in there as well.

Let’s start with the cream of the crop: Manufacturing and car sales.

Manufacturing increased in the U.S. and pretty much everywhere around the world that isn’t Europe. The Institute for Supply Management’s survey of purchasing managers found factory activity in December hit 53.9, the highest level since June. Meanwhile, The JPMorgan Global Manufacturing Purchasing Managers’ Index rose to 50.8 in December from 49.7 in the previous month. (Any number above 50 means expansion.) The non-manufacturing sector also saw good news, with economic activity growing for the 25th consecutive month, according to the ISM. Eleven of 18 business sectors reported growth. It wasn’t a huge increase – .06 percent over November – but it was an increase. These numbers follow the Commerce Department’s report that new orders for manufactured durable goods in November increased for the fourth time in the last five months.

U.S. car sales for December were down only slightly (0.3 percent) from November but still up 8.9 percent year-over-year, according to Autodata estimates. Even with that miniscule decrease, those were the best two months for car sales since June 2008 (excluding the period when the government was offering bribes to car shoppers with its cash-for-clunkers program). This will be a significant boost to the U.S. GDP for the fourth quarter of last year.

Why so much good news? People are indeed buying things again, which demonstrates that there is pent-up demand in the markets. Big businesses are sitting on so much cash they probably don’t worry about spending a bit of it. This is what economists’ call a virtuous cycle – where business and consumers spur each other into greater economic activity. Right now business needs to do a lot more of the spurring because consumers, as we have seen, are mostly making their purchases with credit. Even so, buying a car suggests a level of optimism much greater than an increase in Holiday spending.

On January 23, Commerce will release its numbers for December. For planning purposes, keep an eye on “new orders for nondefense capital goods excluding aircraft” — a proxy for business spending on new equipment. That will tell you if the economic boomlet is continuing.

Tomorrow I’ll pull the weeds on the rest of the numbers – and hopefully kill off this metaphor for good.

Last updated: Jan 5, 2012

CONSTANTINE VON HOFFMAN | Columnist

Constantine von Hoffman is a writer and sometime standup comedian. His work has appeared in Harvard Business Review, NPR, Sierra magazine, Brandweek, CIO, The Boston Herald, TheStreet.com, and Boston Magazine.

The opinions expressed here by Inc.com columnists are their own, not those of Inc.com.



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