Weakening Sentiment Threatens the Recovery in March

March felt a lot like the other months since the economy has begun to "recover." Despite a splattering of positive economic reports, the recovery faced some headwinds. Gas prices soared and unrest in the Middle East continued to weigh on the market's mind. Yet looking at those reports provides a pretty clear picture: the U.S. economy continued to improve, though the recovery may have slowed a bit. The big obstacle facing the economy now is weakening sentiment, which may have resulted from those rising gas prices.

Here's our monthly chart providing a snapshot of some of the month's major economic indicators:

month in review 2011-03.png

Starting with the "direction" column, you see a lot of green. In fact, there's a little more green there than in February, when four metrics were worsening. Moreover, one of those -- foreclosure activity -- is a little bit misleading. Really, foreclosures are being driven more by banks ability to ramp up their new procedures than new defaults. So this statistic is more something to note than something to take to heart about the direction of the housing market.

Unfortunately, there is a theme that can be quickly found in the other two of the three metrics that worsened: sentiment took a hit in March. That's a pretty serious problem in an economy looking for new jobs. Consumer sentiment drives spending, which needs to increase for firms to feel the need to hire more workers. Small businesses were also feeling worse about their economic prospects in March, which also could harm the prospect of more hiring. The only silver lining here is knowing that consumer confidence actually rose a little bit in April

As for the indicators that improved, their paces varied. A few of those that switched from worsening to improving were new and existing home sales. That sector has not stabilized yet, so it's hard to get very excited about a one-month improvement. Jobs improved modestly during the month, though sales and spending growth was slow slower than in February. Finally, even though personal income appeared to grow quickly, as noted, that was driven mostly by inflation and government entitlements -- not by the private sector boosting salaries.

In general, we saw more of the same in March. The recovery continued, though it did so at a relatively slow pace. A few aspects of business held the economy back, while others helped it on its way. This pretty much fits in with what we've been seeing: an uneven, choppy recovery where no component of the economy is confidently rushing forward, but most are shyly moving forward and occasionally taking a step back.

Notes/Disclaimers about the matrix above:

  • This month I changed the employment indicator from "Net Jobs Added to the Economy" to "Employed Americans." It occurred to me that the former version of this statistic actually was a direction-of-change measure, not a basic economic statistic. So the new version more accurately fits with the way the other indicators are observed in the chart.
  • This is by no means a completely exhaustive list, but it does take into account many important statistics.
  • It represents a somewhat quantitative summary, but no weighting has been used to create an economic index, so the reader can decide how important each statistic is for himself or herself.
  • There is some overlap.

For anyone who wants to dig deeper into the numbers above, here's a list of posts that covered some of these March indicators:

Did Americans' Income Really Rise in March?

When an 11% Rise in New Home Sales Fails to Impress

Gasoline and Food Drive Up Retail Sales in March

Foreclosure Activity Up 6.5% in March

Small Business Expects Economy to Slow

Jobs Picture Brightened Slightly in March with 216,000 Added

Service Sector Growth Slowed in March

Consumer Confidence Dives in March