US economy chugs ahead despite auto and housing slumps

It's a spunky economy.

Evidence is accumulating that America is weathering the downturns in the housing and auto markets.

The economy does have a little wobble, and some economists believe the US is entering a period of subpar growth. But as a whole, it appears to be avoiding dire predictions of a sharp rise in unemployment and a loss of business confidence. In fact, when the Federal Reserve meets Tuesday, the central bankers – who aren't expected to change interest rates – are more likely to be talking about the economy's resilience than any future recession.

One sign of the life left in the economy came Friday when the Labor Department reported the creation of 132,000 new jobs in November. It also revised upward – by 42,000 jobs – its reports for September and October. The last major economic report of 2006 also showed a small uptick in the jobless rate, from 4.4 to 4.5 percent.

"The employment numbers show the economy is sturdy," says Mark Zandi, chief economist at Moody's "The problems in housing and autos have not infected the economy."

The economy's resilience has been a theme of several years' standing – one that predates the 9/11 attacks. The US output of goods and services has survived the damage of hurricanes Katrina and Rita, a run-up in oil prices, and the bursting of the high-tech balloon in early 2001.

One reason for its capacity to take hits is its growing diversity. Indeed, last month's new jobs came in health and financial services, travel, government hiring, and professional services – all helping to offset a struggling manufacturing sector. Even in manufacturing, the picture is not as bleak as it could be, in part because vigorous economies abroad are buying American-made goods.

"It takes a lot to get the economy down," says Ethan Harris, chief economist at Lehman Brothers in New York. "It does have some natural resilience in the face of shocks."

The most recent shock, of course, is the downturn in the US housing market. Last month, the economy shed some 29,000 construction jobs, as builders either completed projects or abandoned them. It was the third consecutive decline in housing-related jobs.

Mr. Zandi expects the housing crunch to continue for another three to six months because housing starts are still falling. "But housing will be less of a drag into the spring and summer," he predicts.

The automotive sector is also acting as a brake on the economy. November saw the loss of 15,000 manufacturing jobs, most of them related to the auto industry. But the industry is no longer the powerful force on the economy it once was. The auto sector is about 10 percent of manufacturing, and manufacturing is about 12 percent of the nation's gross domestic product, estimates David Huether, chief economist for the National Association of Manufacturers. "My forecast is no growth in the auto business for the next couple of years," he says.

But as Friday's report showed, the economy is also busy creating new jobs.

"The demand for executives and managers is very strong," reports John Challenger of the Chicago outplacement firm Challenger, Gray & Christmas. "A significant number of companies are going out to find the top talent and not waiting for it to come to them."

In fact, the Fed, which has been worried about the inflationary effects of a tight labor market, is likely to remain worried, says former Fed economist Ann Owen, now a professor at Hamilton College in Clinton, N.Y. "This strong employment report validates what they have been saying," she says.

In November, wages rose by 0.2 percent, not as much as the 0.4 percent increase in October. On a year-over-year basis, wages are growing at a 4.1 percent rate, or relatively close to the increase in productivity.

"This employment report does not scream high inflation, but I think it's indicating consistent inflationary pressures," says Ms. Owen. "But there is not enough indication of inflation to have them increase interest rates."

Though the economy continued to create jobs, some economic reports last week painted a less rosy picture. In November, the Institute for Supply Management's manufacturing index fell below the level that indicates a growing economy. But its gauge of the nonmanufacturing sector rose to its highest level since May.

There was also mixed news about consumers. Consumer confidence waned in early December, according to a University of Michigan report. But other reports indicate that holiday sales are solid. The government will report this week on November retail sales and consumer prices.

"This holiday period is an important test for the economy," says Lehman Brothers' Mr. Harris. "When you step back and look at how the consumer is doing, you see a solid job market, lower gasoline prices, which help low-income people, and a strong stock market, which is good for the upper income. The only dark cloud is housing."

Slumping consumer confidence may be tied to noneconomic factors, such as the situation in Iraq, says Mr. Huether. Consumer confidence tumbled in advance of the Iraq war and then soared after major combat operations appeared to be over, he recalls. "People were concerned there would be a larger regional war," he says, "and once the uncertainty was squashed, confidence rebounded."

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