Wednesday, February 15, 2012

The U.S. economy is definitely picking up

Today was a solid "good news" day for the U.S. economy: more evidence that the housing market has turned up, strong manufacturing production, and a strong NY manufacturing survey. With numbers like this and upside momentum building, the economy is very likely to post stronger growth numbers this year. We'll still be struggling with a gigantic output gap, but the gap should be closing. The public will likely perceive some improvement by the time of the November elections, but I suspect it won't be enough to make a significant difference to the outcome. We are on the road to recovery, but policy blunders along the way have amounted to significant headwinds—we could have been in far better shape if things had been done differently. It's a testament to the inherent dynamism of the US economy that we are doing as well as we are. In my decades of experience, I've learned that one should never underestimate the ability of the U.S. economy to grow, even when faced with significant hurdles.

This index of homebuilders' sentiment is still at miserably low levels, but the improvement in recent months is striking. Things have really improved on the margin, and that is what is most important—not the level, but the change on the margin. This also suggests that housing starts, which rose 25% last year, are likely to continue to pick up.

I know there are still plenty of analysts reminding us that banks have a huge supply of REO that they are going to dump on the market any day now, warning that this will lead to another housing slump. But as this chart shows, the supply of unsold homes has declined significantly in the past year. It's a combination of sales picking up and slower growth in new homes being put up for sale. I see this as a strong sign that the market is clearing; in fact, it's been clearing for several years now (we're over 5 years into this housing downturn) and there isn't a person alive in the U.S. that doesn't know that housing prices have been weak and there are still plenty of foreclosures in the pipeline. Buyers are responding to lower prices, even as there are many still sitting on the sidelines waiting for things to pick up. Problem is, the pickup is usually not visible to most folks until it's well underway. Once it makes headlines, you get a buying stampede as prices and interest rates start to rise. In any event, if sentiment starts to improve, then new buying can easily outweigh whatever new supply the banks might dump on the market. The ingredients for improving sentiment are out there: incredibly low mortgage rates, prices that are an order of magnitude lower than they were 5 years ago, and an improving economy.

There are still lots of vacant homes for sale, and I'm sure everyone has seen several in his or her neighborhood. But on the margin, there are fewer and fewer. That's real improvement.

Since early October, when stocks slumped over fears that a Eurozone financial meltdown would trigger a double-dip recession in the U.S., this index of the stocks of major homebuilders is up 67%. (The S&P homebuilders' index is at a new post-recession high.) Altogether, this is substantial improvement on the margin and there is plenty of upside left.

January industrial production was up by less than expected, but revisions to prior months boosted the index to a new high, and weakness was concentrated in the utility sector, where good weather reduced the demand for electricity. As this chart shows, industrial output in the U.S. economy has diverged substantially from that of the Eurozone economy. We are not dependent on Europe for our growth, and despite all their financial misery and fears, the fundamentals of the U.S. economy have continued to improve. No reason this can't continue. Rather than us fearing that Europe might drag us down in the future, the Europeans are likely cheering the fact that a stronger U.S. economy will provide fundamental support for their own economy. Growth is infectious.

Abstracting from utility output, U.S. manufacturing production—led by the auto sector—has been very strong: up at a 8.6% annualized rate in the past three months, and up at a 6.7% annualized rate in the past six months. (Mark Perry has a nice table showing the breakdown by sector.) It doesn't get much better than this.

Finally, the February Empire State Manufacturing Survey came in very strong, reinforcing the message of the January manufacturing production number.

I haven't seen any news lately from the folks at ECRI, but I imagine they must have abandoned by now their September '11 call for an imminent and inevitable recession.


Bill said...

Re: ECRI- I suppose it all depends on your definition of "imminent."

brodero said...

The year over year growth of Industrial Production-Business Equipment was 10.9%....this number would have to be below 5% and falling
to have a recession imminent

Benjamin Cole said...

Nice wrap-up by Scott Grannis.

And the last three months of the CPI have been flat to down.

Lots of room for sustained expansion. The field is wide-open baby, wide-open. I just hope the Fed wants to run, not quake in fear of imaginary inflationary goblins.

marcusbalbus said...

it's coming soon. we promise. then scott can go back to keeping quiet.

Hans said...

A caveat to all...