Has U.S. economy dodged a recession?

John W. Schoen Senior Producer • Profile • E-mail

A day after reporting a big drop in first quarter economic growth, the government provided fresh data showing the economy rebounding and adding new jobs at a healthy clip. Ordinarily, reports of a sharp slowdown might set off alarm bells among investors and economic forecasters. But the lousy first-quarter numbers reported are history: the latest economic data for April and May indicate that a fairly convincing turnaround is already under way.

Businesses also seem to be getting back in a hiring mood. After a string of subpar monthly gains in employment, hiring in May picked up again. Employers boosted payrolls by 157,000, up from 88,000 in April, while the unemployment rate held steady at 4.5 percent. The payroll numbers were about 20,000 stronger than most economists were expecting

The pickup in hiring was also seen in a monthly jobs report from payroll processor ADP, which said Wednesday that private employers added 97,000 jobs in May. Because the survey does not include government workers, which have been gaining by about 25,000 a month, the ADP numbers suggest that roughly 122,000 jobs were created in May, according to Joel Prakken, chairman of Macroeconomic Advisers, which jointly manages the data collection with ADP.

“Almost all of this job growth is coming from companies of small and medium size,” said Prakken. “But it is worth noting that for the first time since November of last year, there actually was an increase in employment at large firms in May.” 

What a difference a few months makes. After a relatively good showing of 2.5 percent growth in the fourth quarter of last year, the U.S. economy slammed on the brakes in the first three months of 2007. Originally pegged at 1.6 percent growth, the government Thursday revised that estimate downward to just 0.6 percent — barely dodging an outright downturn.

An ongoing slump in the housing market, along with layoffs in construction, real estate, mortgage banking and other related industries, has weighed heavily on the economy. Big financial losses by U.S. car makers have also brought widespread layoffs in auto manufacturing.

Fearing a further slowdown, businesses cut back sharply on inventories in the first quarter to avoid getting caught with unsold goods. That only made the slowdown worse.

But over the past two months, there have been signs that business is picking up again. One of the latest came Thursday from a closely watched index of buying by purchasing managers, which moved higher than expected in May and showed strong growth in manufacturing across a broad range of industries. So the sharp cut in inventories in the first quarter may already be helping the economy get back on its feet again.

“When we go into the second quarter, we're going in with lean inventories,” said John Bitner, chief economist with Eastern Investment Advisors. “So the demand will be met from actual production. And we expect the second quarter to rebound.”

There are other promising signs in economic data released since the books were closed on the first quarter. Consumer spending remains relatively strong. So do corporate profits.