Economy improving; job growth is still weak

WASHINGTON -- Factories are producing more. Construction is growing. People are buying more cars. The holiday shopping season is off to a strong start.

Normally, all that would suggest a bright outlook for the economy. The problem is employers still aren't hiring much, the number of people seeking unemployment benefits remains high and Europe's debt crisis poses a grave threat to the future.

Thursday's mixed economic picture came a day before the government will report on unemployment and job growth for November. That report is expected to show a modest net gain of 125,000 jobs, scarcely enough to keep up with population growth. The unemployment rate is projected to remain 9 percent.

Analysts say the economy remains locked in a good-but-hardly-good-enough position: It's growing consistently, yet too weakly to induce employers to hire aggressively.

"The economy is picking up momentum as we close out 2011," said Neil Dutta, an economist at Bank of America Merrill Lynch. At the same time, it faces "an ongoing flu in Europe" and other challenges, such as uncertainty about future taxes and spending in the United States, Dutta said.

For now, factories are expanding. The Institute for Supply Management, a trade group of purchasing managers, says its manufacturing index rose to 52.7 in November, up from 50.8 in October. Any reading above 50 indicates expansion. Factories have grown for 28 straight months.

Manufacturers are slightly more hopeful about the next few months because of cheaper raw materials and healthy demand, said Bradley Holcomb, head of the ISM's survey committee.

Still, he said, companies have tempered their outlook because of concerns about whether the economy will grow consistently, uncertainty about federal taxes and regulation and fear that Europe's debt crisis may trigger a global economic panic.

Mark Vitner, an economist at Wells Fargo, suggested that employers are reluctant to hire freely because the U.S. economy's future appears hazy.

For one thing, a Social Security tax cut that provided an average $1,000 in extra cash this year for about 160 million Americans could expire at year's end. Republican lawmakers did take steps Thursday to extend the cut, along with emergency unemployment benefits. But it's still uncertain whether the money will be renewed.

In addition, the Obama administration's health care reform could slow hiring next year, Vitner said, because it will require companies to provide coverage by 2013 or pay a fine.

And any worsening of Europe's financial crisis could cause U.S. and European banks to cut back on lending and hoard cash. That would slow the economy.

Concerns about a credit crunch led the Federal Reserve and five other central banks to take coordinated action this week to lower the cost of dollar loans in Europe and elsewhere.

Vitner said he thinks employers want to see stronger customer demand and economic growth before they step up hiring -- rather than hire in anticipation of it.

That could turn into a vicious circle. Without more jobs and higher incomes, consumers won't spend more. Yet without more spending, companies won't increase their payrolls.

Vitner expects growth to pick up to 3.1 percent in the current October-December quarter, but then fall back to about 2 percent in 2012. A recession in Europe could cut up to 0.4 percentage point off next year's growth, he said.

The manufacturing survey also showed that new orders and production rose to a seven-month high, but a measure of employment fell as factory hiring slowed from the previous month.

"Manufacturers are trying to meet demand without significantly increasing their workforce," said Ryan Wang, an economist at HSBC Securities.

Worker productivity rose in the July-September quarter by the most in 18 months, while labor costs fell. A more productive and cheaper workforce can boost corporate profits.

But unless companies see more demand, they're unlikely to step up hiring. And manufacturers could soon suffer declining demand overseas. About 20 percent of U.S. exports are shipped to Europe. And most economists expect Europe's financial crisis to tip that region into recession next year.

China, the world's second-largest economy, is also slowing. Manufacturing in China contracted in November for the first time in nearly three years, according to business surveys released Thursday.

Separately, the government said the number of people who applied for unemployment benefits rose last week. It also said U.S. builders spent more in October on new homes, offices and shopping centers. Despite the gains, overall construction spending remains depressed.

The projected job growth in November would mark a slight gain from the previous month, when the economy added just 80,000 jobs.

Some economists are more optimistic after ADP, a payroll provider, estimated Wednesday that companies added 206,000 workers last month. That survey did not include government agencies, which have been cutting jobs.

Other data reinforce the outlook for an improving economy. Retailers reported a strong start to holiday sales over the Thanksgiving weekend, consumer confidence surged in November to the highest level since July, and Americans' pay rose in October by the most in seven months.

Those reports have caused many economists to forecast a pickup in growth in the final three months of the year, to about a 3 percent annual rate. That would be up from 2 percent in the July-September period.