Elliot Eisenberg, Ph.D.
While economic growth has been lackluster since the end of the recession in summer 2009, this is likely to change, despite the sequester. Here are my top four reasons why, in rank order of their importance to the economy going forward.
The painful process of deleveraging is over. Deleveraging is, in part, what caused this recession to be so painful compared with all other post-WWII recessions. Non-financial corporations have outstanding balance sheets, and have actually begun to releverage. Commercial and industrial loans are once again on the rise and the banking sector is healthier than it has ever been since record keeping began. To give just one indicator, the core capital ratio of banks is 9.2%; the post WWII average is 7.5%. Households are pretty good shape too. There are now only about nine million households seriously behind on some sort of payment. At the peak of the recession, the number was 20 million, while now credit card and auto loans and personal loan defaults are all profoundly low. The surprisingly rapid rate of deleveraging is partly why the housing sector is now recovering much faster than expected.
The housing market has turned the corner and the next few years should be excellent. At their weakest, housing starts were 550,000 units/year. They are now at 900,000 and should grow by 200,000 units/year for the next three to four years, topping out at about 1.7 million units in 2016. This is being driven by a rise in household formations that were delayed due to the anemic job market. Note that each new home creates about 5 new jobs nationwide, so 200,000 new homes means a million new jobs. And while there are still about three million first mortgages in foreclosure, that number is way down from where it was and is on its way to the 750,000 mark, which is the historic norm.
The next reason I am optimistic is because US corporations are profoundly competitive and have drastically lowered their costs. As a result, they are now able to compete with firms anywhere and win. Unit labor costs are way down. In the manufacturing sector, they are back to where they were 20 years ago, and as a result corporate profits have been setting records quarterly. Productivity is so high firms that would not have previously considered manufacturing here (like Apple) are now taking a second look.
Lastly, despite severe dysfunction on Capitol Hill, substantial progress has been made on the fiscal front. The cumulative impact of the tax increases and spending cuts enacted in spring 2011, during the debt-ceiling fiasco of late summer 2011, the recently completed New Year’s Day fiscal-cliff negotiations, along with the most recent sequester have come close to stabilizing our public debt-to-GDP ratio somewhere in the 75% to 78% range. With another $500 billion in spending cuts and or tax increases over the next decade, we will be done.
Our economy has come a long way. The worst is over and by the end of the year the economy will hopefully look a lot different than it does now. And housing will be leading the way.