The Battle for the U.S. Economy's Future: Cars and Houses vs. Washington
Auto and home purchases are in the business of saving recoveries -- and they're saving ours. If only D.C. could stop messing it up.
Barely perceptible, behind the cacophony of the Egypt & Zimmerman news cycle, you can make out the steady drumbeat of good news about the economy. Consumer confidence at a six-year high. About 200,000 new jobs per month in the last quarter. A 20-year low in credit card delinquencies.
And for this, the U.S. economy has two things to thank. Cars and houses.
Before we go forward, let's go backward. After practically every recession going back 50 years, cars and houses have led the recovery. They're big. They're expensive. And when people buy them, they drag the economy back to normalcy. With data from economist James Hamilton, Jordan Weissmann showed that growth due to cars and home purchases accounted for more than half of the recovery in the 1970s, a third of the "Reagan Recovery" in the early 1980s, a sixth of the recoveries in the early 1990s and 2000s, and a vanishingly small one-tenth of this, our special non-recovery recovery. As the car and home sales have dried up, the bounce-backs have been steadily less bouncy.
The Great Recession was "great" because the avalanche started in the housing sector. Financial crises last longer because they leave consumers and companies with debt they have to unwind before they get back to buy big ticket items. The Federal Reserve pushed mortgage rates to historic lows in an effort to peel the housing market off the floor. But without an appetite for new homes, this was like pouring premium gasoline into a car without an engine. Until now.
Driving the Recovery
Speaking of cars, new vehicle sales are on pace to hit 16.5 million this year, their highest since 2006, according to TrueCar. Domestic auto production has also hit a seven-year high ...
... but the real turn-round in the last year has been in houses. Housing starts (very simply: the number of houses where construction has started) rose to a five year high this spring. Meanwhile ...
The upshot is that two anchors on economic growth for the first three years of the recovery -- residential investment and construction employment -- are suddenly perking up and headlining this little era of good feelings. For years, consumers shedding also debt shed points from GDP growth. Suddenly, it seems the age of deleveraging might be over. (Construction job growth in RED; residential investment in BLUE.)
If cars and houses are back, why does the overall economy still fell so ... meh? We're still chugging along around 2 percent annual GDP growth. We're still pulling the unemployment rate down by micro-ticks every quarter. We're still struggling to produce a semblance of real wage growth for the bottom half of the country. What's holding us back?
Unfortunately, the answer begins with Washington.
Bad Cuts & Bad Talk
This is where some of you say: Oh great, more of you complaining about Republicans cutting spending. So, fine, don't take my word for it. Listen to IMF chief economist Oliver Blanchard, whose organization just slashed our estimated growth rate this year due to "stronger than expected and stronger than desirable fiscal consolidation [that] has been only partly offset by a good performance of the housing market."
And the kicker: "If fiscal consolidation had been weaker, then growth in the US would be substantially higher." In other words: The rush to cut the deficit is cutting into growth.
The IMF isn't Nostradamus. But you don't have to have access to a crystal ball to know that cutting spending too quickly in an economy recovering from a debt overhang is dangerous. You just need access to a newspaper. Europe's grand experiment in austerity is a relentless lesson in why financial crisis + shrinking government = intractable recession. The U.S. deficit, which has acted like a crutch for the weak private sector and weaker state governments, isn't just shrinking. It's disappearing, falling nearly 50 percent in the first nine months of FY2013 from a year earlier with sequestration setting in. This is pointless and hurtful. In particular, the attention diverted from jobs toward debt has locked millions of people into devastating long-term unemployment.
Joining Congress in the dunce seat this quarter is the Federal Reserve, whose "tapering" announcement triggered a rise in interest rates that could dampen the housing recovery. The Fed's ability to communicate its outlook on the economy is as significant as its policies. And right now, its communication skills are blerg. In an effort to outline the end of its extraordinary quantitative easing program, the Fed seems to have convinced financial markets that bad news is good news (i.e.: if the economy stinks, QE goes on) and good news is bad news (i.e.: if the economy grows, QE winds down early). This is crazy. We're growing at 2 percent a year. Core inflation isn't just low. It's never been lower. As Matt Yglesias puts it, "good news should just be good news." And the Fed could make that very point simply by simply saying that unless inflation rises, there will be no tapering no matter how good the U.S. economy looks.
Getting out of a financial crisis is hard. It's even harder when the stewards of the economy on Capitol Hill and inside the Fed have a knack for throwing obstacles in front of the stumbling recovery patient that is America enterprise. And yet, once again, the U.S. private sector seems to have manufactured something that would be the envy of most of the developed world. A true recovery. If we can keep it.