Five reasons to be optimistic about the U.S. economy

economy-optimismCan a bullish case be made for the U.S. economy? Indeed it can, so long as one doesn't lose sight of the many hurdles the economy still faces, given the financial crisis and the ongoing tight credit situation, which continue to impact international trade, business investment and personal spending.

Manufacturing sector. The Institute for Supply Management's Purchasing Managers Index for the manufacturing sector increased to 52.9 percent from 48.9 percent in August -- its eighth straight monthly increase, and the first time the PMI has been above 50 since January 2008. Since readings above 50 indicate an expansion, the fact that the factory sector is growing is a bullish sign for the economy. At least historically, when factory output increases, some firms begin hiring.

Housing starts. The nation's housing sector continues to mend: Housing starts rose 1.5 percent to a 589,000-unit annual rate in August – another sign of housing sector stabilization. True, housing starts are still down 29 percent from a year ago, and roughly 1.6 million construction jobs have been lost, according to ADP (ADP) since January 2007, but the uptrend is significant: it suggests the worst may be over in the home building segment.

U.S. exports. The trade picture continues to improve. In July, U.S. exports rose about 2 percent to $127.6 billion. Recent monthly increases have not been stupendous, but again, the trend is the key: it represents an additional sign that demand is increasing. (Exports also have been aided by a weaker dollar, which makes U.S. goods cheaper for foreign buyers.)

Wealth. Household wealth increased by $2 trillion in Q2, according to the U.S. Federal Reserve's Flow of Funds report. The significance? Gains in household wealth usually lead to increased consumer confidence, which historically has led to increased consumer spending and business investment.

Jobs. Finally, the job market appears to be on the mend. True, the economy is still shedding jobs -- payrolls declined by 216,000 in August -- but the bulk of the job cuts triggered by the recession appear to be over. That doesn't mean job cuts will end within a quarter, but one can begin to foresee the day when the economy will start adding jobs again, perhaps as early as early the spring 2010.

Economic Analysis: The above data suggests an economic recovery has begun. Still, the economy could fall back again due to a decline in demand, another spike in home foreclosures, or an unexpected event (domestic or international), giving us a double-dip recession. Further, investors should not lose sight of the 6.9 million jobs that have been shed during the recession. The lost jobs translate into an enormous loss in purchasing power and output. The United States will likely need years of expansion to get back to pre-recession employment and output levels; but the signs of stabilization and recovery exist.
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