While you were away celebrating the holidays, the economy sprang to life. I can’t blame you for not noticing. After all, the holidays are supposed to be a festive time. And the U.S. economy has been stuck in the mud for an extended period.

Sure, we’re out of the recession, but there’s little reason for cheer either, especially for the estimated 17% of the U.S. population that is either officially or unofficially counted as unemployed. There were signs of life in the economy last spring, but those “green shoots” turned brown by summer.

Yet while many investors took a respite from the stock market, a curious thing happened in the final days of December: Those green shoots re-appeared. In various corners of the economy, activity is starting to pick up, and if it can be sustained, a virtuous cycle may ensue whereby modest growth begets more robust growth as confidence builds.

What you missed
The U.S. economy starts and ends with jobs. Any improvement in the employment picture would provide a tangible boost to many sectors of the economy. So it’s helpful to see jobless claims start to fall. New unemployment claims fell by 34,000 last week to levels last seen nearly 30 months ago. It may be a statistical blip due to the holiday-shortened week, but the less volatile 4-week moving average also is starting to look healthier.
 


Source: Labor Dept.

Just a few days before Christmas, we also learned that orders for durable goods — excluding the volatile aircraft category — rose 2.6% sequentially in November, reversing losses seen in the prior month.

To cap things off, the Institute for Supply Management (ISM) reported on Monday morning that manufacturing activity continued to expand, while several data points implied that the first quarter of 2011 should be bring more good news from the factory floor. In a separate report also released on Monday, the Commerce Department noted a 0.4% sequential jump in construction spending in November, slightly ahead of consensus forecasts.

#-ad_banner-#Looking ahead
The coming fortnight will bring further clues as to whether the economy is really swinging back into action. Here are some key items to watch:

Friday, Jan. 7: the monthly employment reading
Even as jobless claims fall, the unemployment rate has barely budged. An improving economy can provide a distorted view of this snapshot, as formerly discouraged workers get back in the job hunt. By some estimates, there are almost as many people that are unemployed and not even bothering to look for work (and are thus uncounted) as there are people that are actively seeking work. That means the headline number of 9% to 10% unemployment may actually be closer to 17%. As a result, an unemployment rate stuck above 9% doesn’t necessarily mean that conditions aren’t improving. It only means that the ranks of the uncounted are moving into the ranks of the counted.

Nonfarm payrolls grew by just 39,000 in November, thanks in large part offsetting layoffs at state and local governments. Yet economists think payrolls expanded by a healthier 140,000 in December, which would drop the unemployment rate from 9.8% to 9.7%. If they’re right, you’ll start to hear about forecasts for even better numbers in the months ahead. It’s been nearly three years since the economy was consistently creating more than 100,000 jobs per month. But be prepared for some of that momentum to be blunted by the public sector, where further deep layoffs appear inevitable .

Friday, Jan. 14
One of my favorite economic indicators, which is overlooked by most, is the National Federation of Small Business (NFIB) Optimism Index. Even as large enterprises may look to embark on new hiring schemes this year, it’s the smaller firms that really set the conditions for increasingly dynamic economic activity, as they are much more likely to concentrate any hiring plans here in the United States. The NFIB index is looking better these days, after having risen for four straight months to a recent 93.2. It bottomed out at 81 more than a year ago. Any move toward the 100 mark would be a clear sign of better days ahead. The NFIB will release its latest snapshot next Friday, Jan. 14.

That’s actually shaping up to be a very important day for economy watchers: We’ll also get the latest reading on consumer prices, retail sales, industrial production, consumer sentiment and business inventories. By the end of that day, we’ll have a much clearer sense of an economy on the mend, or perhaps yet another sober read-through of dismal data.
 
Action to Take –> Stocks kicked off the new year on a very happy note, posting impressive gains on Monday. Investor bullishness stems from hopes that these economic data points will keep rising higher. Circle your calendar for Jan. 14. The torrent of economic news released that day will set the stage for an even higher stock market. But if the data are weak, any early January rally could quickly peter out. You should prepare yourself, either way.