April 2010

By Timothy R. Homan April 30 (Bloomberg) — Steelworker James Borgan knows firsthand what’s driving the U.S. economic rebound. Business at his mill in Brackenridge, Pennsylvania, which makes specialty steel for electrical transformers, is the best it has been since at least the summer of 2008, before the wrenching effects of the credit crisis, he says. “When we get increased orders, we need more hands on deck, so that’s more people working,” says Borgan, 56, a union employee at the plant, which is owned by Allegheny Technologies Inc. Manufacturing is leading the U.S. out of this recession, and Borgan and his co-workers are part of it. Rising factory orders , the best monthly jobs creation in three years, the stock market rally and gains in corporate profits all run counter to the predictions — most notably from Pacific Investment Management Co.’s Mohamed A. El-Erian — that economic growth would be tepid this year, Bloomberg Markets magazine reports in its June issue. A surge in manufacturing helped the U.S. economy grow late last year at more than double the pace economists had forecast at the beginning of the fourth quarter. The committee of the National Bureau of Economic Research that determines when U.S. recessions begin and end said on April 12 that it was too soon to declare an end to the recession that began in December 2007. “This is the stage where it becomes more clear that it is a durable recovery,” says Dean Maki , chief U.S. economist at Barclays Capital in New York, whose forecast of gross domestic product for 2009 was the most accurate in a Bloomberg News ranking. Payrolls in the U.S. rose by 162,000 in March, the most in three years. Consumers Next “We think the monthly jobs growth will continue through the rest of the year,” Maki says. The next step needs to be a revival in consumer spending, which makes up about 70 percent of the country’s economic activity, Maki says. Here too, he sees positive signs. “Consumers are spending the additional income that they’re earning, and to me, that’s the key to this becoming self-sustaining.” The economy probably grew at a 4.5 percent annual rate in the first three months of this year, according to Maki, whose forecast is higher than the median estimate of 3.3 percent among economists surveyed by Bloomberg News. The U.S. Commerce Department releases its estimate of GDP for the period at 8:30 a.m. in Washington. The economy expanded at a 5.6 percent annual pace in the fourth quarter, the best performance in six years. Recent jobs data support the bullish case for the economy. Companies, not just the government, are adding workers. Private payrolls increased in the first quarter of 2010, and factories had their longest streak of jobs growth since 2006. The unemployment rate was 9.7 percent in the first three months of this year, down from 10.1 percent in October. Profits and Jobs Corporate profits, considered by economists such as Joseph LaVorgna at Deutsche Bank Securities to be a leading indicator of growth, posted the biggest year-over-year gain in a quarter century in the last three months of 2009. Companies are more willing to add workers when their profits are rising. Home Depot Inc. , the largest U.S. home-improvement retailer, is adding store jobs for the first time in four years in anticipation of a rebound in sales. The Atlanta-based company forecast in February that revenue would climb 2.5 percent this year, for the first increase since 2006, and analysts are predicting a jump of more than 10 percent in earnings per share. Still, most economists say a rebound in manufacturing isn’t enough to keep a recovery going. Factory activity is only about 12 percent of the U.S. economy. ‘Not Enough’ “Manufacturing is helping,” says Nigel Gault , chief U.S. economist at IHS Global Insight in Lexington, Massachusetts. “The trouble is that manufacturing is not big enough relative to the size of the economy. Nor is it likely to generate lots of jobs since it’s a lot easier to increase productivity in manufacturing than it is in the service sector.” Productivity gains let a company meet higher demand without hiring more workers. Gault wants indications that the U.S. consumer is starting to spend more, and there have been some. Consumer purchases are up for five consecutive months through February — the longest string of gains since late 2007 and early 2008. On the other hand, the growth in spending slowed from 0.6 percent in October to 0.3 percent in February. And consumer credit in the U.S. contracted in February, signaling that Americans may be unwilling or unable to borrow and spend the way they did during much of the past decade. Indeed, El-Erian has said that economic growth will be constrained by the effects of years of too much debt. That’s part of the scenario he wrote about in May 2009 in which he predicted that the “new normal” for long-term economic growth would likely be less than 2 percent. El-Erian’s Prediction Government stimulus spending and loose monetary policy may keep growth at 3 to 4 percent in the first half of 2010, El- Erian said in an April 20 e-mail. Consumers may spend more and save less in the first half of the year and then do the opposite in the second half, with growth dropping to 2 percent, he said. Purchases can be influenced by trends in wages, changes in employment, consumer confidence levels and the value of the assets a consumer owns. The rout in housing has done damage to many Americans’ biggest asset. Home prices have fallen for three years, and a rebound has yet to take hold. What’s worse, about 4 million U.S. homeowners will likely face foreclosure filings this year, a potential record, and lenders may seize 1 million homes, according to forecasts by Irvine, California-based RealtyTrac Inc. Borgan, though, shows how a turnaround in confidence might carry the day. He says he’s optimistic about the country’s growth as orders pour in at the mill, and he’s put his money where his mouth is. The steelworker bought a 2009 GMC Envoy sport utility vehicle, made by General Motors Co. , after clamping down on spending when the economy was shrinking. “A lot of people went into hibernation during that time,” Borgan says. “Now we’ve got a little breathing room.” To contact the reporter on this story: Timothy R. Homan in Washington at thoman1@bloomberg.net