Economy Shows Surprising Bounce

Posted on March 25, 2013

U.S. businesses and consumers have shown surprising muscle in recent weeks, shrugging off for now the impact of higher taxes, a flare-up of trouble in Europe and the budget cuts that took hold this month.

Gauges of employment, retail sales and manufacturing all have notched healthy—if not blockbuster—gains, prompting many economists to ratchet up estimates for first-quarter growth. In a Wall Street Journal survey last week, economists raised their estimate of gross domestic product for the first quarter to an average annual rate of 2.2%, up from a 1.7% estimate in January.

“A number of strong data points,” on retail sales, jobs and housing spurred David Berson, chief economist at Nationwide Insurance, to raise his estimate for first-quarter GDP growth to 2.8% from around 2%. “The government cut spending very little” in March, he said, so the effects are likely to be felt more later in the year.

It’s now clear that consumers and businesses absorbed January’s and February’s higher payroll taxes and gas prices without losing their footing. What is unclear is whether the momentum can be sustained in an environment where there is deep mistrust of lawmakers’ ability to clear obstacles to growth.

Some of the factors that threatened consumers at the start of the year are expected to recede in the second quarter. Gas prices climbed almost 50 cents in January and February and have been falling in March. Consumers are adjusting to the bite from higher payroll taxes. Tax refunds, some delayed by wrangling over the fiscal cliff, failed to mute February’s retail sales and could help lift March’s numbers. And confidence has been buoyed by rising home values, the bull market in stocks and easier access to credit.

However, there is much ground to be made up. The 7.7% unemployment rate has eased from the 10% level of October 2009 but is far from the 4.7% average for the months leading up to the recession in 2007. And while housing appeared to turn a corner last year, the market has a long way to go to dig out from the depths of the bust.

The Federal Reserve, noting the economy’s improvements, has been reluctant to react too abruptly by pulling back from its easy-money policy. Fed Chairman Ben Bernanke, noting Wednesday that previous spurts in the jobs market had been short-lived, said central-bank policy makers will be looking not only for enduring labor-market strength but also “broad-based improvement in a range of indicators.”

Washington’s budget battles are perhaps the biggest headwind. Most experts expect spending cuts known as the sequester to weigh on growth in coming months as the reductions, which were triggered March 1, take effect. The Bipartisan Policy Center, a Washington think tank, estimates the sequester could shave 0.5% from GDP growth in 2013.

The chief executive of Kirkland’s Inc., a Nashville, Tenn., retailer of lamps, mirrors and other home merchandise across 35 states pointed to such concerns in an earnings call this month. “Given the recent rise in taxes, the sequester, plus the inability of the Fed to provide more in the way of positive impetus, slow economic growth seems to be the most likely scenario for all, or most, of 2013, absent new positive economic developments,” CEO Robert Alderson said on the call.

That wariness is widespread and largely precluding local businesses from going all-in on spending.

While the housing market’s gains have boosted forestry company M.A. Rigoni Inc., Richard Schwab, manager of procurement and new-business development says he is spending cautiously until he sees further momentum as well as fiscal clarity from Washington.

“When everyone else had a recession, because of the housing bust, the wood-products industry went into a downright depression,” Mr. Schwab says.

The downturn chastened Mr. Schwab and Perry, Fla.-based M.A. Rigoni—which grows and harvests pine trees to make paper and lumber. The firm weathered the past few years by “figuring out more efficient ways to produce wood and truck it,” Mr. Schwab says. The firm cut its overhead by containing fuel costs and trimming its work force from between 50 and 55 employees during the boom to 40 today. For some logging and trucking duties, Mr. Schwab has about 45 or 50 subcontractors, who are employed by other companies and to whom he pays fixed rates.

Mr. Schwab says business picked up after lumber prices rose in mid-2012, when the housing market’s initial improvement spurred saw mills to ramp up to meet greater demand for building supplies. But he is putting off hiring or investing in capital equipment and raw materials.

Florida restaurateur Burt Rapoport is seeing the momentum—and the skepticism—in his five restaurants in Palm Beach County.

Mr. Rapoport says first-quarter sales are up between 5% and 8% from the year-ago period—but bar bills at dinner are down. “A lot of them are telling us that they have a drink at home before they go out,” he says.

But they are still going out: Mr. Rapoport just opened his fifth restaurant, Burt & Max’s Bar and Grille, four weeks ago. The restaurant “has been full every night and there has been over an hour wait for tables every night,” he says.

Still, Mr. Rapoport says uncertainty about fiscal policy and the effects of the coming health-care law are keeping him from expanding further. “At this point,” he says, “we know the landscape is going to change, but we don’t know how it’s going to change.”

Brenda Cronin,