Economic Reports Show Modest Growth and Fragile Recovery
Reports last week made clear that the economy is enjoying modest growth even though the recovery remains fragile and business leaders cautious.

The U.S. economy continued to improve modestly in February despite severe winter weather in many regions, according to the Federal Reserve's latest Beige Book survey of economic conditions, released last week. Nine of the Fed's 12 regional banks reported that economic activity had improved in February.

"Consumer spending improved slightly in many districts since the last survey, but severe snowstorms in early February limited activity in some districts," the Beige Book said. "Manufacturing activity strengthened in most regions, particularly in the high-tech equipment, automobile and metal industries."

In a separate report last week, the Institute for Supply Management's latest manufacturing ISM Report on Business indicated that the manufacturing sector expanded for the seventh consecutive month in February, in line with the overall U.S. economy, which expanded for the 10th consecutive month.

However, construction spending fell for a third straight month in January. Overall construction spending in the U.S. dropped 0.6 percent from the previous month. Housing construction rose 1.3 percent, while spending on nonresidential projects fell by 2.1 percent. After the third monthly decline, construction spending in January stood at a seasonally adjusted annual rate of $884.1 billion, down 9.3 percent from January 2009.

Economists generally agree that the economy is growing at a modest pace, although the possibility of sustained positive momentum remains anything but assured. Business leaders continue to feel uneasy about overall economic improvement. Grant Thornton LLP's latest Business Optimism Index, a quarterly survey of U.S. business leaders, fell slightly to 58.8 in February from 60.4 in November 2009. Only 43 percent of business leaders surveyed expect the economy to improve in the next six months, down from 53 percent in November.

Job Losses Slow in February
Non-farm payrolls declined by 36,000 jobs in February, leaving the national unemployment rate at 9.7 percent — unchanged from the prior month, according to the latest monthly employment report from the U.S. Department of Labor, released on Friday. However, the report states that Labor Department data may have been disproportionately affected by adverse weather conditions last month, with some workers being absent during pay periods.

A separate employment report released on Wednesday from payroll services firm Automatic Data Processing (ADP) — which has findings less affected by weather conditions and excludes government workers — said that non-farm private employment decreased by only 20,000 jobs last month, following a 60,000-job decrease in January.

"The February employment decline was the smallest since employment began falling in February of 2008. If the recent trend continues, and given first-quarter GDP growth of 5.9 percent, private employment could rise next month for the first time in two years," Joel Prakken, chairman of Macroeconomic Advisers, which compiles the employment data for ADP, said in an announcement of the findings.

Employment in the goods-producing sector fell by 37,000 positions in February, while the manufacturing sector rose by 3,000 jobs, the first gain since January 2008. The services sector added 17,000 new jobs, the ADP report noted. Small businesses shed 18,000 jobs, medium-sized companies lost 8,000 jobs and large businesses declined by 10,000 jobs.

On Tuesday, the U.S. Senate passed a measure to continue unemployment benefits an additional month, setting the stage for the consideration of a wider-ranging bill that would extend such safety-net programs through the end of 2010, according to the New York Times.

"There are a lot of reasons to fret about this state of affairs, but the biggest is that the longer the jobless recovery remains jobless, the less likely is the recovery to be sustainable," The Economist's Free Exchange blog cautions. "If sustained increases in employment don't develop soon, it is difficult to see how the American economy avoids slipping back into contraction."

Productivity on the Rise
U.S. work productivity in the non-farm private sector grew at a 6.9 percent annual rate through the fourth quarter of 2009, reflecting a 7.6 percent increase in output that was partially offset by a 0.6 percent increase in the number of hours worked, the Bureau of Labor Statistics reported last week.

Some of the largest gains were in the manufacturing sector, in which fourth-quarter productivity rose by 6.6 percent, with output increasing 5.5 percent and hours worked falling 1 percent. Over the past four quarters, manufacturing productivity has risen by 6.1 percent. Unit labor costs, which measure the cost of the labor needed to produce one unit of output, fell by 6.3 percent in Q4 2009 and 4.7 percent over the last four quarters.

The combination of boosted productivity levels and declining unit labor costs may improve companies' profitability and reduce inflation pressures, but it also places stress on consumers by leaving them with less available income, which in turn damages consumer spending rates, according to the Associated Press notes.

"Since labor is the largest expense for most businesses, the drop in unit costs has pushed up profit margins," the Wall Street Journal notes. "Once productivity growth recedes, however, expect unit labor costs to grow again, meaning total profit growth will have to come from more sales, not from cost cutting."

Automotive Recalls Continue
"General Motors Co. joined troubled rival Toyota Motor Corp. with some quality issues of its own on Tuesday," MarketWatch reported last week.

The Detroit automaker has recalled 1.3 million compact cars sold in North America over the past five years due to problems with power-steering functions. The power-steering assist in 2005- through 2010-model year Chevrolet Cobalts and 2007-2010 Pontiac G5s, along with similar models in Canada and Mexico, can sometimes fail, according to GM, which added that the cars are safe to drive. A remedy is still being developed and customers will be alerted when the fix is finalized, GM said in a statement.

Meanwhile, Toyota Motor Corp.'s massive recall has damaged the automaker's reputation and the company is facing legal and PR problems on several fronts. In response, the world's largest automaker said last week that former U.S. Transportation Secretary Rodney Slater will lead an independent North American quality advisory panel to advise the company's North American affiliates on quality and safety issues. The panel will work closely with Toyota's North American leadership team, and will have direct access to Toyota President Akio Toyoda.

The grandson of the company's founder recently apologized to Congress and millions of American Toyota owners for safety lapses that led to deaths and widespread recalls for accelerator and braking failures, and vowed to "work vigorously and unceasingly to restore the trust of our customers."