Durable U.S. Recovery at Hand as Growth Shifts
Almost three years after it began, the U.S. recovery may strengthen as autos and housing begin to reemerge as mainstays of growth.
“The traditional engines that tend to give you a recovery are kicking in now,” Joseph Carson, director of global economic research at AllianceBernstein LP in New York, said in an interview. “We’re seeing confirmation of sustainability from all sides. That’s a real business cycle.”
Over the past two quarters, measures normally associated with early stages of lasting rebounds, including hours worked, employment, consumer and business sentiment, household spending on durable goods and residential investment, have picked up in tandem, said Carson. Ian Shepherdson at High Frequency Economics Ltd. is betting the comeback from the worst financial crisis since the Great Depression will be rooted in a thawing of lending, an area that usually lags behind.
Household spending led by durable goods like automobiles, as well as gains in homebuilding, may account for more than half of the first-quarter advance in gross domestic product, according to Carson. Those two areas contributed 1.7 percentage points to the 3 percent gain in gross domestic product at an annual rate in the fourth quarter and probably made a similar contribution in the past three months, he said.
That marks a shift from the period following the recession. Exports and business investment accounted for about 70 percent of the 2.4 percent growth seen in the first nine quarters of the recovery, compared with a historical contribution of about 20 percent in rebounds spanning the past five decades, according to Carson, who worked as an economist at the Commerce Department.
U.S. stocks joined a global selloff today as political uncertainty in France and the Netherlands intensified concern about Europe’s sovereign debt crisis. The Standard & Poor’s 500 Index fell 0.8 percent to 1,366.94 at the 4 p.m. close in New York. So far this year, the S&P 500 is up 8.7 percent amid signs the U.S. is gaining strength.
The world’s largest economy grew at a 2.5 percent pace from January through March, according to the median estimate of economists surveyed by Bloomberg News before the Commerce Department’s report on April 27. Carson projects the gain will be 3.5 percent. Consumer spending rose at a 2.3 percent rate, the best performance in more than a year, the Bloomberg survey showed.
One stand-out in the rebound for consumer durable goods is automobiles, typical of the early stages of a lasting expansion, Carson said. Cars and light trucks sold in the first quarter at the strongest pace in four years, according to Ward’s Automotive Group. The pickup is linked to job gains, according to Mark Fields, president of the Americas at Ford Motor Co. (F)
“Bolstered by a recent strengthening in the economy and the improving employment situation, U.S. industry sales have surged in the early months of 2012,” Fields said in a conference presentation telecast on April 4.
Ford this month raised its 2012 forecast for total U.S. vehicle sales to as much as 15 million. If Ford’s prediction is on the mark, industrywide vehicle purchases would rise by about 2 million this year from 12.7 million in 2011, according to Carson. Such an increase has occurred only three times in the past 40 years, and in each of those cases -- 1971, 1976 and 1984 -- an economic recovery was taking hold, he said.
“We’re starting to see improvement in consumer confidence and, combined with rising fuel prices and aging vehicles, the market is starting to move,” Bob Carter, Toyota Motor Corp.’s group vice president for U.S. sales, told reporters on April 5 at the New York auto show. “It’s happening quicker than anyone thought.”
Consumers won’t be the only ones buying more vehicles, predicts Shepherdson, chief U.S. economist at Valhalla, New York-based High Frequency Economics. Credit is starting to become more readily available, which will make it possible for small- and medium-sized companies to replace aging delivery trucks, he said. That means business investment probably won’t slow much this year, according to Shepherdson.
“We are seeing a real recovery in bank credit,” he said in an interview. “In an economic cycle that has been defined by a credit event, credit is not a lagging indicator, it’s a missing link.”
Bank loans to commercial and industrial companies have climbed 14 percent in the 52 weeks ended April 11, the biggest year-to-year gain since November 2008, according to Federal Reserve data.
“The credit situation couldn’t be described as easy, but it can be described as easier,” said Shepherdson. “The economy will therefore take off properly.” Shepherdson and Carson both forecast the economy will grow 3 percent this year, compared with a 2.3 percent median estimate of economists surveyed by Bloomberg this month.
Steve Latin-Kasper, director of market data and research at the Detroit-based National Truck Equipment Association, is among those with first-hand knowledge of the improvement.
“We’re seeing demand not just for consumer durables, but for capital equipment as well,” he said in an interview. “We’ll continue to see steady growth in spending.” Latin- Kasper projects the economy will grow about 3 percent this year and is not ruling out a 4 percent gain in 2013.
Not everyone is as optimistic. Household finances and the job market aren’t robust enough to encourage consumers to splurge, cooling global growth will restrain exports, and housing “is going nowhere,” said Joshua Shapiro, chief U.S. economist at Maria Fiorini Ramirez Inc. in New York. Monetary and fiscal policy are also limited in their ability to spur growth.
“The economy has not yet reached a breakaway momentum,” Shapiro, who forecasts GDP will rise 1.9 percent this year, said in an interview. “We’re still muddling through. Consumers aren’t ready to open their wallet in any grand manner” and “are increasingly aware they’re going to have to fend for themselves as there will be less government largesse.”
Housing will play a bigger role as employment improves, consumers repair balance sheets and more people move away from their families and gain confidence to strike out on their own, according to Shepherdson and Carson.
Rising home sales ripple through the economy by spurring demand for everything from building materials like paints to furniture and electronics, said Shepherdson.
Purchases of building materials jumped 22 percent in the first quarter from the prior three months, after rising 10 percent, according to Carson’s calculations.
While unseasonably mild temperatures probably boosted demand, “there is no way that that entire increase is a weather effect,” said Shepherdson. “Some of the rebound is real and sustainable.”
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