New unemployment claims fell to a nine month low in October. This trend has been struggling to get going for several months now. However, the possibility of an improving job market is a good sign for the U.S. economy.
Update: Consumer sentiment also rose. That is a little bit more good news for the economy.
Unfortunately, the news isn’t anywhere good enough to declare an economic recovery. The “good news” about the labor market we have been getting for the last several months means more about the job market bottoming out than it does about it getting better. Essentially, if you were drawing a graph of the U.S. labor market, these last couple of months of good economic news and indicators means you can stop drawing your line down. It does not mean, however, that you can start drawing that line back up.
There are two major stumbling blocks now to an economic recovery. The first is the very unstable situation in Europe. What once looked like a problem for a couple of the continent’s weakest economies now looks like a full-fledged crisis for the entire European Union. Any collapse, or loss of faith, there and the U.S. economy will be pulled back under. The second issue rearing its head is the expiration of current payroll tax cut.
Established a temporary tax cut (aren’t they all?) the current tax cut reduced the amount workers pay for FICA (Social Security taxes) from 6.2 percent to 4.2 percent.
See information about small business FICA taxes.
That tax cut expires on December 31, 2011 and it means that millions of Americans will be surprised in January by lower take home pay just when they start getting their bills for the holiday shopping season. Nothing slams the breaks on a weak economic recovery like consumers that tighten their wallets and avoid spending.
Pretty much every reputable economist out there agrees that eliminating the payroll tax cut will not only reverse the stimulating economic effect it had, but will also act to slow growth, just when it is getting started.
Of course, like everything in Washington these days, extending the tax cut is caught up in partisan bickering by politicians who grow ever more loyal to their parties while caring less and less about what it good for the country and the U.S. economy. Time will tell if the party bosses can wring enough bragging rights from some sort of agreement to get the extension before it is too late. Even one round of smaller paychecks could have a chilling effect on consumer spending.
