Economic optimism grows, but risks remain

— -- Nurse Next Door, a Canadian home health care provider, is fielding 100 inquiries a month from prospective franchisees in the USA, up from 20 last spring.

Jacobs Realty Group of Radnor, Pa., has seen two dithering clients lose out on office building purchases to other buyers in the past two weeks — a phenomenon that hadn't occurred in about four years.

And in the past month, six customers of Maykus Custom Homes have signed letters of intent to buy newly built houses in the Fort Worth area. The previous average: one a month — maybe.

Four years after the recession officially began in December 2007, economists, businesses and consumers alike have expressed a growing optimism about the recovery in recent weeks. The more confident, if still tempered, outlook is taking shape as the nation seems to be navigating past some big stumbling blocks — such as high gasoline prices — that have impeded growth most of this year. Some recent encouraging signs:

•Vehicle sales in November rose 14% from a year ago to an annual rate of 13.6 million — their best showing since cash-for-clunker incentives drove purchases in August 2009. Economists cite, in part, the recent easing of auto shipment disruptions that followed the Japanese earthquake early this year, as well as a less diffident consumer.

"We're getting some pent-up demand kicking in where people who have not replaced for a long, long time, particularly if they're still working … are deciding it's time," says Nigel Gault, chief U.S. economist at IHS Global Insight.

•The unemployment rate last month fell 0.4 points to 8.6%, lowest since March 2009. Although the decline was partly due to a 315,000 drop in the labor force as discouraged job seekers simply gave up, employment is up an average 321,000 a month since August, according to the Labor Department's household survey. Most encouraging: Much of the hiring appears to be by small businesses, which typically fuel job growth in a recovery.

•The housing market, though still anemic and weighed down by foreclosures, is showing small signs of life. In October, pending home sales jumped 10.4% from September and permits for new single-family homes were highest since May 2010. Builder sentiment also has edged up the last two months and is at an 18-month high.

"We're finally getting back on course," says Chris Rupkey, chief financial economist for Bank of Tokyo-Mitsubishi.

Worries about Europe

Even so, the recovery remains relatively tepid amid lackluster household income growth and still lacks sufficient momentum to generate enough jobs to significantly lower unemployment next year.

And financial turmoil in Europe could still derail the upswing. Stocks have fallen more than 3% this week after Fitch Ratings and Moody's said an agreement at a European summit last week does little to alleviate the massive debt burdens of some countries.

Many economists consider a European recession almost certain. That would hobble U.S. exports and cut economic growth slightly , but only a meltdown that paralyzes global credit markets would push the U.S. back into recession, Gault says.

On the plus side, Democrats and Republicans in Congress now seem committed to continuing this year's Social Security payroll tax cut and extended jobless benefits for the long-term unemployed through 2012, though they still disagree on how to pay for it. A bill passed by the House this week ties the extensions to approval of a controversial oil pipeline — a move Democrats oppose. Failure to extend the tax break would shave about half a point off economic growth next year and reduce employment by 450,000, says Mark Zandi, chief economist of Moody's Analytics.

The more buoyant outlook has lifted stocks. The Standard & Poor's 500 index is up 9.3% since hitting a recent low Oct. 3.

After expanding at an annual rate of just 1% in the first half of this year, the economy grew 2% in the third quarter and is on pace for 3% growth in the fourth quarter. Most economists expect uninspiring growth of about 2% next year — far short of the 3%-plus needed to make a dent in unemployment. Zandi says many businesses will not ramp up hiring significantly because they'll remain uncertain about taxes, federal spending and regulatory reform until after next year's election shuffles a politically divided government.

Some are more bullish. Dean Maki, chief U.S. economist of Barclays Capital, expects the economy to grow about 2.75% next year as it hits a 3% pace by the second half on stronger income growth, higher stocks since 2009 and lower inflation. That should be enough, he says, to generate about 215,000 jobs a month in the last six months of 2012 — more than the 150,000 or so that many economists expect — and cut unemployment to 8% by year's end.

Small businesses accelerate hiring

A big reason for the fresh optimism is a pickup in small-business hiring. In November, small-firm owners increased employment slightly for the first time in five months, according to a survey by the National Federation of Independent Business (NFIB). Small businesses also accounted for more than half of the 206,000 jump in private employment last month reported by payroll processor ADP. Many of those firms are start-ups, says Diane Swonk, chief economist of Mesirow Financial.

"It smells like things are getting better," says Bill Dunkelberg, NFIB's chief economist.

Credit conditions for small businesses have gradually improved in recent months, according to the Federal Reserve. Ami Kassar, CEO of MultiFunding, a loan adviser for small businesses, says the number of start-ups that seek his help has more than doubled over last year, but loans are still very difficult to obtain.

In Evanston, Ill., Mitch Dulin, a serial restaurant entrepreneur, opened Central Street Café in August largely because he wanted to take advantage of low lease rates and sensed the local economy turning up. "I saw things getting better," Dulin says. "If I were to wait a year, the lease would cost me 20% more."

Dulin says he paid cash for the renovation of the space — at a cost of $500,000 to $1 million — and might not have gone ahead with the project if he had needed to get a loan. The 60-seat restaurant, he says, is full for both lunch and dinner, and he turns away more customers than he serves. All 14 full-time workers were previously jobless, Dulin says.

In Mount Kisco, N.Y., Mike Wolfe launched a social-media marketing company after he lost his job as a commercial insurance salesman in February and couldn't find a similar position. It started as a part-time gig in his home, but revenue quadrupled as cost-conscious businesses cut marketing staff and outsourced projects to him. "Next thing I knew I didn't need to find a job anymore — I had this," he says. Wolfe has hired three full-time employees, plans to add five workers next year and is seeking office space.

Nurse Next Door, with 46 franchise locations in Canada, has been planning to expand to the U.S. since its founding 10 years ago, says co-CEO John DeHart. The initiative became more viable the past year partly because the fall in the U.S. dollar made it less expensive, he says.

Each franchisee must spend $125,000, including franchise fee and building costs, to open a location. In August, when the debt-ceiling crisis, U.S. credit-rating downgrade and European turmoil sent the stock market tumbling, several prospective franchisees put their plans on hold. As stocks have been rising recently, inquiries have surged. "We're seeing more potential partners coming back to the table saying, 'We're ready, we have this cash,' " he says.

Two U.S. locations, in Colorado and Oregon, are slated to open early next year, and the company plans to launch 25 by next October — each employing 50 to 100 home health aides and nurses. Therrell Oglesby, 50, is starting a franchise in Fort Collins, Colo., in February. Noting that her investments recently recovered, she says, "I'm able to do it now."

The pickup in business start-ups has been a boon for Jacobs, the Radnor, Pa., commercial real estate broker. His firm has handled 20% more leases the past six months than it did the first half of the year, and he plans to open a second office in Philadelphia. Many of his clients are laid-off executives who are launching their own businesses. Landlords who were holding out for higher rents despite the decline in property values and occupancy rates "finally realize they have to be aggressive on a deal to bring the tenant in," Jacobs says.

Large companies, meanwhile, are experiencing steady growth. Cargo volumes for Union Pacific, the No. 1 freight railroad, are up 3% this year, and CEO Jim Young expects "more of the same" in 2012. "Until you see some meaningful change in employment levels, I think it's going to be very tough to see the economy moving in a strong direction," Young says.

Still, the company plans to exceed its record $3.3 billion in capital spending this year as it purchases 200 locomotives, double its 2011 pace. Besides girding for growth, the company wants to take advantage of low contractor prices while they last, Young says.

The housing market is ticking up as new households are created. Young adults who have been living with their parents are moving into their own homes amid somewhat stronger job growth. Household formation totaled 1.1 million in the 12 months ending last March, up from 357,000 the previous 12 months.

At the same time, the inventory of new homes has reached a record low, says economist Patrick Newport of IHS Global Insight. "At some point you need to ramp up housing starts in a big way," he says. He expects 675,000 single- and multifamily starts next year, up from 600,000 this year — still less than half the 1.5 million in a normal year — and 960,000 in 2013.

After adding virtually nothing to — or subtracting from — economic growth in recent years, "You're talking about housing finally being a meaningful contributor to the overall economy" in 2012 , Mesirow Financial's Swonk says.

Kosse Maykus, the Fort Worth-area contractor, built 14 homes this year, about double last year's pace. Until recently, customers had been putting off construction of their dream homes in the hopes of getting a better price for their existing houses, Maykus says. "Folks I see today are more realistic," he says.

Consumers are also slightly more confident. In the past three months, Pat Tormey, 64, of Scarsdale, N.Y., has bought a $1,200 high-definition TV, a $129 coffee maker, a $239 cellphone and two pairs of $300 Mephisto shoes. "I think my portfolio is on a gradual slight incline," says Tormey, an adjunct professor of business at local colleges. "You feel a little richer. I have a lot of confidence in the future."