The economy is showing some signs of strength — not tremendous strength, mind you, but enough to prove there was adequate heft to weather the partial government shutdown and keep investors in a stock market that has climbed a remarkable 23.6 percent this year.
The service sector, which ranges from retail to housing to health care, is growing faster than expected; manufacturing is too. Neither is as strong as in August, and a slump in machinery orders has given economists pause. But reports from the Institute for Supply Management covering services and manufacturing show the economy is expanding and improving more than economists were expecting.
The manufacturing index "is vividly flagging a U.S. economy expanding at the fastest rate in more than 2 1/2 years, which is rather inspiring," said Gluskin Sheff economist David Rosenberg.
Now, if only employment and wage growth would follow. Friday will provide a glimpse as the October unemployment numbers are released.
Expectations are that it will not be a good report. After all, about 800,000 federal employees were furloughed in October amid the partial government shutdown, and economists think companies might have hesitated about hiring while waiting to see the impact of lost federal business.
"The shutdown affected government contractors and businesses that catered to government workers around the Washington, D.C., area," said Citigroup economist Robert DiClemente. He calculates that people indirectly affected by layoffs in the capital and around the country may total 30,000 to 40,000.
The distortions, he said, could mean that the October employment report to be released Friday will show only 130,000 payroll gains — far below the 200,000 monthly average early this year. But the shutdown was only the latest hit to employment. Apart from those temporary cuts, economists have been disappointed with trends over the last six months. Job creation has slowed, and the average gain in payrolls has been just 155,000 a month. That's not enough to make a substantial improvement in employment.
Goldman Sachs economist David Mericle recently estimated the labor market wouldn't return to the pre-financial crisis average until early 2017.
In addition, with millions of people still seeking jobs, there has been no urgency to raise pay. The combination of joblessness, sluggish pay and low confidence about the future is weighing on consumption.
Retail analyst Kimberly Greenberger thinks retailers will feel the impact this holiday season. In a recent report, she said department stores and specialty shops should "expect coal."
"We predict the weakest holiday since 2008," as retailers feel compelled to slash prices to attract reluctant consumers, she said.
About 79.5 percent of Americans said in a recent National Retail Federation forecast that they will be cutting back holiday spending this year, and 51 percent said they will buy less because of economic concerns.
Federal Reserve Chairman Ben Bernanke has said repeatedly that he is concerned about unemployment turning into a long-term, entrenched problem for the country. He has been trying to stimulate hiring by keeping interest rates down. Economists have pointed to a chicken-or-egg problem: Demand for products isn't strong, so companies don't hire, but with millions of people out of work and on limited pay, demand doesn't increase substantially.
The issue isn't limited to the U.S. Demand for U.S. products and services has been curtailed by a recession in Europe and slowing emerging markets, including China. The unemployment rate in Europe is more than 12 percent, and the European Commission predicted Tuesday that growth in 2014 will be slower than anticipated — just 1.1 percent.
The U.S. stock market and stocks worldwide have climbed this year on expectations of an improving global economy. The Stoxx Europe 600 index has climbed about 15 percent, while the U.S., which is further ahead in recovery, has climbed even more.
The expectation has been that the Federal Reserve would start cutting back on stimulus as early as December or March because of an improving economy. While the Fed may start reducing bond buying, known as quantitative easing, Goldman Sachs economist Jan Hatzius said in a report this week that the Fed's first interest rate hike isn't likely until early 2016. The reason: a change in thinking about fighting unemployment.
Recently, the Fed has indicated that it wanted unemployment to fall from the recent 7.2 percent to 6.5 percent before allowing interest rates to climb. Now, however, Hatzius thinks the Fed will be adopting a new target of 6 percent for unemployment. His prediction is based on two papers from top Fed economists that are expected to get attention this week at an International Monetary Fund annual research conference.