Is a Recession Coming? Not If Consumers Can Help It

Remember how one of James Baker's rationales for the Persian Gulf War, beta version, back in 1991 was "jobs, jobs, jobs"? See, that's pretty much the heart of my amateur rationale for why I think the economy will avoid a recession this year despite all the fears about housing. Jobs, jobs, jobs. Well, to be exact, jobs and income. Consider the following, and see if you agree:

1) Last week, initial unemployment claims dropped for the third time in four weeks, pushing the four-week average to 316,750. That's about the same as last year's average of 313,000 and down sharply from 338,250 three weeks ago, which was the highest since October 2005. Clearly that big winter spike in jobless claims last month was weather related and did not reflect a sudden weakening in the economy.

Now compare today's strong job market with the job markets before the economic downturns that started in July 1990 and November 1991, as dated by the National Bureau of Economic Research. In 1990, initial claims climbed steadily throughout the year. In January, they averaged 289,700.

But then they started surging, rising from 320,00 in the first week in May to 349,000 by the first week of July. And in November 2001, initial jobless claims were averaging 480,750 vs. 340,000 in January that year. In both cases, there was a marked deterioration in the job market before the recession. It's just the opposite case today.

2) Earlier today, the Labor Department reported that personal income rose 0.6 percent in February, with wages and salaries up 0.4 percent. For the quarter, employee compensation is running at a 9.1 percent annualized pace. As the econ team at JPMorgan put it in a report today, "While one-off bonus payments explain some of this surge, the elevated pace nonetheless highlights important wherewithal for consumer spending."

And indeed, real consumer spending rose 0.2 percent in foul February. Even a so-so March, JPMorgan added, "would imply a 3.6 percent pace for the quarter. There now appears significant upside risk to our 3 percent consumer spending forecast for the quarter." As it is, real consumer spending has increased at a 3.7 percent annual clip the past three months.

So there you go. Americans are working, getting paid good dough, and spending it. (The big surge in government tax revenues is another sign that there is plenty of juice out there.) That points to an economy that will continue to expand–2006 fourth-quarter gross domestic product was just revised up to 2.5 percent from 2.2 percent–going forward.

Oh, and this just in: The Chicago Purchasing Managers Index posted its largest one-month movement ever in March, rising to 61.7 from 47.9, thanks to big jumps in new orders, production, and backlogs.

Questions or comments can be sent to jpethokoukis@usnews.com. I read them all.