Next year's economic growth will be strong -- and the drivers will be the same things that crashed the economy four years ago: housing and debt
Financial crises are sometimes lazily compared to hangovers. But the cliché is more useful than you'd think. When things get rough, sometimes you need a little of the excess that got you into trouble in the first place -- what alcoholics call "hair of the dog." Today the economy seems to be sampling the greatest hits of the Bubble: more debt, a resurgent housing market, risky bets on Wall Street, and households borrowing to their max. Those might sound frighteningly familiar, but they could also drive economic growth to better levels than we've seen in recent years.
Everything starts with housing, the largest and most important asset on the balance sheet of most households, and in recent months we've seen upticks in both housing starts and home prices, with the Case-Shiller home price index now showing year-over-year gains.
Because of some combination of having already reduced debt levels, more confidence in house prices, and more confidence in the job market, households are no longer paying down debt. In two of the last three quarters households have added more debt than they've paid down, and if the pattern repeats in the third quarter it will be the first time in four years that households have shown a year-over-year increase in debt outstanding.