This is the first of three posts looking at how the economy will do in 2013. Today, we consider why the fundamentals of the U.S. economy point toward a good year. On Thursday and Friday we'll look at the biggest risks to that positive outlook, first that the federal government will mess it all up, and second that international troubles could reemerge and dampen Americans' prospects.
There is good reason to think that 2013 will be the finally be the year that the U.S. economic recovery really feels like a recovery: The biggest forces that have been holding the economy back finally seem to be subsiding.
There is a risk, of course, that new headwinds will gather to hold the economy back — but more on that on Thursday and Friday. Today, a look at why this should, by all rights, be quite a happy new year.
The recession began five years ago and ended more than three years ago. Yet some 12 million Americans are still looking for work, and many millions more would confirm that it hasn’t felt like a recovery at all. That would include the people who have seen their incomes flatline or have been drowning in mortgage debt for years on end.
The data support this impression, that the U.S. economy still hasn't really recovered. Since the start of 2010, growth has averaged 2.2 percent, which would be just fine in normal times, but is lousy considering the starting point was a time of mass unemployment and general economic despair. The nation is poised to approach the fourth anniversary of economic recovery this summer with something approaching a $1 trillion gap between what it is capable of producing and what it is actually producing. Within that trillion dollars are the squelched dreams of millions of families who wanted a better economic life.
It will take a few years of real growth — at least 3 percent, but 4 or 5 percent shouldn’t be too much to ask — to change that dynamic. And the stars are aligning for 2013 to be the beginning of a period of above-par growth. Let’s consider the things that have been holding things back, and why those headwinds may finally be fading:
Housing. The biggest cramp the economy these last few years has been the housing sector, with sales near historic lows for half a decade. At first, this was a necessary adjustment, as the overbuilding of homes during the 2000-2006 boom was worked off. But we’re far beyond that point now, with, if anything, significant under-building of homes in recent years relative to demographic trends. That’s true even when one adjusts for the lower-than-normal “household formation” during the recession and its aftermath (think young college graduates living in their parents’ basement instead of getting an apartment).
One day, this mismatch—too few houses being built relative to the number of people who need a place to live—will be resolved, and that day seems to be today. The number of housing units started, an 861,000 annual rate in November, is up 22 percent from a year earlier and up a whopping 58 percent from two years earlier. And there is plenty of reason to think that the upswing will continue. That 861,000 number is still well below many estimates of the longer-term rate of household formation, which put in the 1.2 million ballpark. That means there is plenty more room for housing construction activity to grow, giving a boost to the economy.
One more positive: So far, the increase in construction jobs has not matched the increase in home-building activity. In fact, for the year that ended in November, the number of residential construction jobs actually fell by 5,000. It is a bit of a mystery as to why, but one sure thing is that it can’t go on forever; if building activity keeps rising, construction companies will need more workers. And this is low-hanging fruit for helping the labor market; the unemployment rate among construction and extraction workers was a high 12.9 percent in November. Taking construction workers who are currently sitting idle and putting them to work building new houses and apartment buildings that a growing population needs is just what this economy needs.
Household debt. American consumers, we have often heard, have been weighed down the debts they incurred during the boom years -- credit card bills, student loans and, especially, burdensome home mortgages. A widespread theory is that consumer spending will never really rebound until Americans have dug themselves out from under those debts.
The good news is that, through a combination of their own efforts to save money, low-interest rate policies from the Federal Reserve and defaults and foreclosures, Americans seem to be far along their deleveraging path.
The ratio of household debt to GDP has fallen from a peak of 98 percent at the start of 2009 to 81 percent in the third quarter, about the 2003 level.
The cost of servicing that debt is down even more because of low interest rates; the ratio of household debt servicing costs to after-tax personal income was down to 10.6 percent in the third quarter, near its lowest levels on records. The Fed's policy actions have brought down rates on credit cards and auto loans, and more and more people are able to refinance their mortgages as home prices rise.
Americans’ household balance sheets are looking as good as they have in a decade, which means that as 2013 begins, debt overhang no longer looks like a dark cloud over the economy.
State and local governments. Among the persistent drags on the economy through this weak recovery have been state and municipality budget woes. State and local governments have slashed spending and jobs, essentially counteracting federal stimulus efforts with fiscal anti-stimulus measures of their own.
From 2000 to 2008, state and local governments added an average of 226,000 jobs a year. But since 2008, the sector has cut an average of 154,000 a year, as states struggled to balance their shrinking budgets hampered by lower tax revenues and higher spending on social welfare needs.
But they may finally be through with that adjustment process. With tax revenues climbing and major budget-cutting already completed, state and local government employment seemed to have bottomed out in May, and has been on a gentle upswing since (adding a total of 48,000 jobs in the ensuing six months). Don’t look for the this sector to be a major driver of hiring, but by ceasing to be a negative, it could stoke the potential for 2013 to be a good year.