Analysis: Fears of slowdown fade as economy shows some muscle

WASHINGTON (Reuters) - A few months ago economists were all but
certain the U.S. economy would slow sharply at the start of this year,
with many warning that recession risks were growing.
That
pessimism has been shaken off by a string of surprisingly solid data
that paint a picture of an economy with building momentum.
The jobs market is picking up, manufacturing is accelerating and the service sector is also flexing its muscle - good news for President Barack Obama, who faces an election battle in November.
"We
were among those people that had been expecting growth to slow. It now
seems a lot less likely," said Jeremy Lawson, an economist at BNP
Paribas in New York.
The main reason for this newfound optimism
is rising employment, which should help support the consumer spending
that drives two-thirds of U.S. economic activity.
Even Nobel
economist Paul Krugman, who has pushed for years for more aggressive
policies to spur growth, let a notable ray of light into his latest New
York Times column, coupled as it was with a reminder that the economy
remained depressed.
"It's not hard to see how this recovery could become self-sustaining," he wrote.
Employers
added 243,000 new jobs in January, the most in nine months, and the
jobless rate dropped to a three-year low of 8.3 percent.
In
manufacturing, activity picked up for a third straight month in January
with a growing backlog of orders suggesting the strength would be
maintained.
A similar picture emerged from the economy's vast services sector, which enjoyed its strongest month in nearly a year.
"The
downside risks are evaporating and we are seeing some upside risks to
growth," said Harm Bandholz, chief U.S. economist at Unicredit Research
in New York.
RECESSION FEARS FADE
Last summer, an already
weak economy took a blow from Europe's sovereign debt crisis and an ugly
fight in Washington over budget policy that cost the nation its AAA
credit rating.
Business and consumer confidence plummeted, stock markets sank and economists began to warn of recession.
The
loss of confidence, however, threw economists off track. The recovery
actually accelerated into the end of the year, and by December it was
increasingly clear some of that momentum would last.
"Late last
summer, I saw a 50-50 chance of recession. I have dialed that down quite
a bit," said Robert Dye, chief economist at Comerica in Dallas. He now
sees recession odds below 25 percent.
While households dipped
into their savings late last year as they stepped up spending, with job
growth accelerating it increasingly appears that rising income will
begin to bear the load.
Personal income jumped by the most in
nine months in December and January's employment gains suggest another
decent increase last month.
The data has led Wall Street firms to push their GDP forecasts higher.
BNP
this week more than doubled its first quarter growth forecast to a 2.5
percent annual rate, barely a slowdown from the fourth quarter's 2.8
percent clip.
Deutsche Bank is now penciling in 2.8 percent growth, up from 2 percent; Morgan Stanley
lifted its forecast to 2.2 percent from 2.0 percent; and economists at
TD Securities see output rising at a 2 percent rate instead of 1.6
percent.
Goldman Sachs said it might rethink its 2-percent growth forecast for 2012 if upside surprises keep rolling in.
It wasn't supposed to be like this.
Two-thirds
of the fourth-quarter's growth was driven by a rebuilding of business
inventories, much of it concentrated in autos. As that effort slowed,
the economy was supposed to cool as well.
But auto sales rose in January at their fastest pace in nearly 2-1/2 years, making inventories look far from bloated.
While
mild winter weather helped spur economic activity over the last two
months, economists are increasingly convinced that jobs and income are
starting to drive the recovery.
"There are hints that a virtuous
cycle may be building where employment, income and consumer spending
move up together," said Nigel Gault, chief U.S. economist at IHS Global
Insight.