Uh Oh: The Economy's 2 Biggest Signals Are Pointing in Opposite Directions

Housing leads recoveries. It's a law of American economics. There would have been no "Reagan Recovery" without the acceleration of home building in 1981. The last two bounce-backs -- shallow as they were -- in the early '90s and '00s also corresponded with a huge run-up in residential construction. So one reason why this recovery has been so disappointing is that home prices have kept falling, buyers have kept waiting, and the economy's most important booster engine has been dormant.

That might be changing. For the first time all year, sales prices for existing homes rose in April. Home sales are up, too. And construction spending is rising:

Screen Shot 2012-07-05 at 11.46.12 AM.png

But the economy's biggest engine is slowly revving up just as our best-working engine -- manufacturing -- is slowly decelerating. It's hard to blame Americans for this one. There is a global slowdown everywhere: Europe is in a continental recession and there are plenty of signs of trouble in China and India. As a result, a key index for manufacturing strength has fallen below 50% for the first time since the recession.

Screen Shot 2012-07-05 at 11.46.32 AM.png

The housing lines are pointing up and the manufacturing lines are pointing down. "If someone looked at just manufacturing, they might think the US is near a recession," Bill McBride writes. "And if they just looked at housing, they'd think the economy is recovering. Which is it?" McBride puts his money on housing, since it's a bigger industry and a leading indicator of recovery or recession. My money is (boringly) on uncertainty. Housing has had something like twenty thousand false starts, and even a true start will announce the beginning of a very difficult recovery, given slow-rising wages, difficult access to credit for middle-class Millennials and Gen-Xers, and a huge shadow inventory. The most likely scenario, I think, is that housing shifts from neutral to first gear and manufacturing shifts from second gear to join housing in first gear, and two big industries slowly growing gives us basically the same recovery rate we've had: slow, frustrating, precarious, and, somehow, consistent.


Presented by

Derek Thompson is a senior editor at The Atlantic, where he writes about economics, labor markets, and the entertainment business.

How a Psychedelic Masterpiece Is Made

A short documentary about Bruce Riley, an artist who paints abstract wonders with poured resin

Join the Discussion

After you comment, click Post. If you’re not already logged in you will be asked to log in or register with Disqus.

Please note that The Atlantic's account system is separate from our commenting system. To log in or register with The Atlantic, use the Sign In button at the top of every page.

blog comments powered by Disqus

Video

How a Psychedelic Masterpiece Is Made

A short documentary about Bruce Riley, an artist who paints abstract wonders with poured resin

Videos

Why Is Google Making Skin?

Hidden away on Google’s campus, doctors are changing the way people think about health.

Video

How to Build a Tornado

A Canadian inventor believes his tornado machine could solve the world's energy crisis.

Video

A New York City Minute, Frozen in Time

This short film takes you on a whirling tour of the Big Apple

Video

What Happened to the Milky Way?

Light pollution has taken away our ability to see the stars. Can we save the night sky?

More in Business

Just In