It has taken more than three years, but the U.S. economy finally is poised for a legitimate economic recovery.
U.S. housing starts surged 12.1 per cent in December, to a pace of construction that would produce 954,000 units over a year, the Commerce Department said Thursday. That's the fastest since June 2008 when the U.S. was about to face the brunt of the worst recession since the Great Depression. On the year, builders started work on 781,000 units in 2012, a 27.5-per-cent increase from 2011.
The U.S. recession ended in June 2009, according to the National Bureau of Economic Research, the outfit that dates business cycles. But it hasn't really felt like it. The world's largest economy has struggled to grow at an annual rate faster than 2 per cent, which is slower than the growth to which Americans became accustomed to during the years ahead of the financial crisis. Only 54 per cent of the 8.8 million jobs lost during the recession have been restored.
It wasn't difficult to spot the reason why the recovery was so slow. Recoveries almost always are led by a surge in home building. Central banks make money cheap, and consumers take advantage to buy the biggest of big-ticket items. Then they buy stuff to put in those homes. Banks make money, freeing them to do more lending; builders hire construction workers, bolstering consumer demand; and so on. It's a frenzy of multipliers.
But there was no frenzy this time. The Federal Reserve made money cheap, but nobody felt like buying a home. Stung by a collapse in housing prices, and saddled with debt, consumers retrenched. Banks tightened their lending standards. Government spending got the economy off the ground, but subsequent private demand only has been enough to keep the recovery from backsliding.
Fed chairman Ben Bernanke said toward the end of last year that 2013 could be a "very good" year. The early signals are good ones.
The housing market continues to gather strength. Home construction is being driven by demand for rental units, and builders now are putting up multiple-unit dwellings at roughly the same pace as they were in the decade before the crash, according to Robert Kavcic, an economist at BMO Nesbitt Burns. Single-family homes, whose inhabitants tend to generate more economic activity than the renters of condos, continue to lag pre-recession levels. But they rose 8.1 per cent in December. That's the start of something.
To be sure, the big gains in housing data are amplified by the fact that construction had sunk so deeply. But there's forward momentum. Municipalities issued building permits in December at a rate that would yield 903,000 units over a year, compared with 900,000 the previous month. With household formation on the rise, inventories near a 50-year low and the Fed doing everything it can to stoke demand, there is every reason to think that housing strength is here to stay.
There might even be momentum in the labour market. Weekly initial jobless claims – a measure of employment that some economists prefer to the Labour Department's monthly survey – plunged to 335,000 in the week ended Jan. 12, the lowest level since January 2008. The Wall Street consensus was for a reading of 369,000. The more reliable four-week moving average fell to 359,000, also near the lowest since early 2008.
Economists pointed out that the Labour Department's weekly claims data can be more volatile than usual at this time of year, but the steady decline of the four-week average suggests at least a gradual improvement.
The U.S. economy still has a long way to go before it fully recovers.
Not that anyone needed reminding, but Mr. Bernanke said earlier this week that the labour market is far from where the Fed would like it to be. And most economists say gross domestic product likely grew little faster than a rate of 1 per cent in the fourth quarter as business investment and exports cooled amid sluggish global demand and worries over fiscal policy in Washington. (The Philadelphia Fed said Thursday that its index of manufacturing collapsed to –5.8 in January from 4.6 the previous month, although responses from company executives indicated that they were more optimistic that conditions would improve.) Federal spending will shrink this year, and taxes will rise, both of which will act as a drag on growth.
Still, the U.S. appears finally to have pushed past a series of false dawns. This is what the start of a recovery is supposed to look like.