Americans dare to hope for a happier 2010

First data of new year suggests recovery is on track but job fears persist

The first readings of the New Year from the world's largest economy painted a cautiously optimistic picture yesterday, as policymakers promised to maintain their efforts to sustain the nascent recovery. US manufacturing activity in December came in ahead of expectations, prompting a stock market rally and raising hopes that the economy may soon be creating more jobs than are being lost.

Meanwhile, at the American Economics Association annual conference in Atlanta, Georgia, academics were debating the likely speed and strength of the country's emergence from recession – and whether the recovery is sustainable. GDP is expected to grow by 2.8 per cent this year, but there are significant variations in economists' forecasts.

The December survey of factory purchasing managers, published yesterday by the Institute of Supply Management, showed a reading of 55.9, above the 54.0 predicted by economists and up from 53.6 in November. Readings above 50 per cent represent expansion in activity. The reading was the highest since April 2006.

"This is what we need in 2010 for a V-shaped recovery," said Alan Lancz, president of Alan Lancz & Associates in Ohio. "It's a very positive sign to have the ISM follow-through after months of improvement in leading indicators. Being over the 50 level is important, but having an increase on top of that especially bodes well. Looks like we're off to a fresh start for the year."

By lunchtime in New York the Dow Jones Industrial Average had jumped more than 1.5 per cent, reflecting optimism not just about the manufacturing sector but about employment more widely. The most keenly awaited data this week is the jobs report on Friday, which is expected to show that the economy lost just 8,000 jobs in December, the fewest since the recession began in December 2007. The economy shed 11,000 in November, fewer than expected, reducing the unemployment rate to 10 per cent.

The unemployment data is considered the most important indicator of the economy's path in 2010 because the US consumer accounted for two-thirds of domestic economic activity before the recession hit. Consumer spending and confidence have been battered because of the speed with which employers moved to slash jobs, curb workers' hours and negotiate down pay.

President Barack Obama and Congressional leaders have promised to push through proposals to support job creation in the coming weeks, but the Federal Reserve's deputy chairman, Donald Kohn, warned over the weekend that a reduction in unemployment was likely to be slow.

He told the American Economics Association meeting that banks were still reluctant to lend money for creditworthy businesses to expand, and also repeated the Fed's mantra that interest rates are set to remain low "for an extended period" to allow the recovery to take hold.

Other attendees were less sanguine. Simon Johnson, an MIT professor, said yesterday that by propping up the financial sector, government efforts to date are only delaying another inevitable crash. "The crisis is just beginning," he warned.