The Great Recession began more than five years ago now (December 2007). It also ended more than three and a half years ago (June 2009). Yet some 12 million Americans are still looking for a job, and millions more would say it hasn’t felt like much of a recovery at all, including folks who have seen their incomes stall or have been drowning in mortgage debt for years.
Since the start of 2010, economic growth has averaged 2.2 percent, which would be just fine in normal times but is less than stellar 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 coming June with an output gap — the difference between what the economy is capable of producing and what it is actually producing — approaching $1 trillion.
It will take a few years of real growth, at least 3 percent, to change that dynamic, and the stars are aligning for 2013 to be the beginning of a period of above-average growth. Let’s consider the factors that have been holding things back, and why those headwinds may finally be fading.
Factors Limiting Economic Growth
Housing Starts And Sales
The biggest hindrance for the economy the last few years has been the housing sector, with sales near-historic lows for half a decade. At first, this was a necessary adjustment in order to work off the overbuilding of homes during the 2000 to 2006 housing bubble. But we are far beyond that point now due to the significant under-building of homes in recent years relative to demographic trends. Even when adjustments are made for the lower-than-normal household formation during the recession and its aftermath (i.e., college graduates opting to live in their parents’ basement instead of getting an apartment), it is still less-than-awesome growth.
One day, this mismatch of 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 approaching. Housing starts increased 28 percent in 2012 (initial estimate). This is a solid year-over-year increase, and residential investment is now making a positive contribution to gross domestic product (GDP) growth. Even after increasing in 2012, the 780,000 housing starts this past year were the fourth lowest on an annual basis since the Census Bureau started tracking starts in 1959 (the three lowest years were 2009 through 2011). Starts averaged 1.5 million per year from 1959 through 2000, but demographics and household formation suggest starts will come close to doubling this year from the 2012 level.
Residential investment and housing starts are usually two of the best leading indicators for the economy. Nothing is foolproof as a leading indicator, but if these trends follow precedent, this suggests the economy will continue to grow over the next couple of years.
Another positive statistic worth noting is that, to date, the increase in construction jobs has not matched the increase in home-building activity. In fact, for the year ending in November, the number of residential construction jobs actually fell by 5,000. It is a bit of a conundrum as to why, but one sure thing is it can’t go on forever.
If building activity continues to rise, construction companies will need more workers, and this is low-hanging fruit for the labor market. The unemployment rate among construction and excavation workers was about 13 percent as 2012 came to a close. Putting construction workers back to work building new houses and apartment buildings for a growing population is just what this economy needs.
Another factor constraining economic growth has been household debt. American consumers, as we have often heard in the media, have been weighed down by the debts they incurred during the boom years, including credit card bills, student loans and burdensome home mortgages.
The good news now is that, through a combination of their own efforts to save money, low-interest rate policies from the Federal Reserve and the attrition from defaults and foreclosures, Americans seem to be further 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 last year, which is about the level it was in 2003 — still not good but heading in the right direction.
Because of low interest rates, the cost of servicing debt is down even more. The ratio of household debt servicing costs to after-tax personal income was down last year to nearly its lowest levels on record. The Fed’s policy actions have brought down rates on credit cards and auto loans, and more people have been 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 the dark cloud over the economy it once was.
The Government’s Contribution
Among the persistent drags on the economy throughout this weak recovery are state and local government budget woes that have precipitated slashed spending and job layoffs. These initiatives have counteracted 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 per year. Since 2008, as states struggled to balance their shrinking budgets hampered by lower tax revenues and higher spending on social welfare needs, the sector has cut an average of 154,000 jobs per year. However, they may finally be through the toughest part of that adjustment process. With tax revenues climbing and major budget-cutting already completed, state and local government employment seems to have bottomed out and has been on a gentle upswing. Don’t look for this sector to be a major driver of hiring, but by ceasing to be a negative, it could fuel the potential for better growth in 2013. Barring any foolish post-fiscal cliff policy gaffes by our national government, we will likely be looking at a decent year.