Economy shows further signs of recovering

More signs that the economy is gathering strength emerged yesterday as big retailers like Wal-Mart reported their best sales in a year while productivity boomed and unemployment claims dropped for a third straight week.

The increase in same-store sales last month, at 4.3 percent, was nearly double the pace set in May and June in a survey of big department stores by the Bank of Tokyo-Mitsubishi Ltd.

Wal-Mart, the biggest retailer, said better-than-expected sales were partly the result of tax rebate checks. With consumer momentum building, the retailer boosted its profit outlook for the rest of the year.

“It was a good month, and it may be a good omen for the second half,” said Michael P. Niemira, vice president of the Tokyo bank. Although warm weather and heavy discounting by retailers accounted for some of the gains, “this could be the start of a much better trend,” he said.

Some analysts said consumers seem to be spending more on clothing, furniture and other discretionary items because sharply higher interest rates since June have dampened interest in buying cars and houses.

While consumers were shifting into a higher gear, the number of people filing new claims for unemployment benefits dropped for a third straight week to 390,000 last week, a sign that the stagnant job market may be improving. The four-week average of new jobless claims compiled by the Labor Department dropped below 400,000 for the first time since February.

Businesses so far during the economic recovery have met growing demand with the same or fewer workers because of strong productivity gains. That continued during the second quarter, with a stunning 5.7 percent jump in productivity reported by the Labor Department yesterday.

Analysts said the acceleration in consumer spending seen last month may force businesses to start adding workers soon.

The “amazing” productivity gains eked out by businesses and workers in the last few years have been “the silver lining in the jobless recovery,” said Bill Cheney, chief economist for John Hancock Financial Services. But “based on today’s jobless claims report, this recovery may not be jobless that much longer.”

Corporate executives were reluctant to add workers early this year largely because the economic outlook was clouded by the war in Iraq, high energy prices and other gloomy developments. That changed dramatically in the second quarter when major combat operations ended in Iraq, oil prices dropped and signs of economic improvement started to accumulate.

The number of executives with an upbeat outlook nearly doubled to 63 percent in the second quarter in a survey of 150 top executives released yesterday by PricewaterhouseCoopers. That is the highest level of business optimism in a year, and analysts say the growing executive confidence, combined with productivity gains, should lead to increased investment and hiring in the months ahead.

“Despite the absence of new jobs right now, the overall increase in sales implied by [productivity] growth has to benefit somebody,” Mr. Cheney said. “There must be some serious gains going on in either profits or wage rates. If it’s going to profits, we should see more capital spending and hiring ahead. And if it’s going to wages or lower prices, that should sustain consumption growth. Either way, it’s good for the outlook.”

Joel Naroff, president of Naroff Economic Advisers, said the economic recovery is unfolding much like the economic expansion of the 1990s, which was slow and hesitant with no job growth at first. But it eventually developed into the longest expansion in history with the most robust employment in decades.

“Firms learned after the ’90-’91 downturn that the way to grow after a recession was to first strengthen balance sheets. That was best done by cutting costs and limiting hiring, thereby improving earnings,” Mr. Naroff said.

“Once profits returned, then firms started to hire again. And since they were financially solid, the expansion took on explosive proportions. That is the exact pattern that is being followed so far in this recovery,” he said.

The stellar productivity gains in the last year have been a key source of profit growth.

“With earnings beginning to improve, the next logical step is for hiring to start picking up,” Mr. Naroff said. “We should see that in the next few months. Once job growth appears, this expansion will move into high gear.”

John Silvia, chief economist with Wachovia Securities, cautioned that no one knows when employment will start growing again because of an unprecedented disconnect that developed between growth and jobs.

The economy has grown for a year and a half while businesses shed nearly a million jobs — all because new technologies like the Internet and sophisticated computer software enabled businesses to produce more with fewer workers. The same level of growth in previous eras would have produced as many as 4.6 million jobs, Mr. Silvia said.

Another reason growth in consumer and business spending has not resulted in increased employment is that imports are fulfilling a growing share of Americans’ needs, he said. Imports now account for about 17 percent of U.S. spending, up from 11 percent a decade ago.

The Federal Reserve and Congress, in providing massive doses of interest-rate cuts and tax cuts in the past two years, have hoped to spur growth. But because of the increased import penetration, Mr. Silvia said, the higher spending they stimulated is not always benefiting American businesses and workers and adding to growth in the United States.

Much of the computer equipment and software purchased by businesses is feeding growth in Asian economies, he said, as are back-to-school sales of clothing and supplies.