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Assemblyman Brian Mullins works on a Ford Expedition at the auto maker’s Michigan Truck plant in Wayne, Mich. (Carlos Osorio/AP)
Assemblyman Brian Mullins works on a Ford Expedition at the auto maker’s Michigan Truck plant in Wayne, Mich. (Carlos Osorio/AP)

A star-spangled recovery: Why the U.S. economy is showing signs of life Add to ...

It’s not quite the recovery that anyone wanted, but it’s a recovery all the same.

The world’s largest economy is still rumbling along in third gear. Unemployment remains too high for comfort; there are nearly 12 million Americans out of work. On Friday, the International Monetary Fund trimmed its 2014 projection for U.S. economic growth to 2.7 per cent, down from 3 per cent.

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That forecast is nothing to get excited about: The U.S. averaged growth of 3 per cent from 2003 to 2006. Meanwhile, the prospect that the Federal Reserve will soon begin to pull back on the extraordinary measures it has been taking to stimulate the economy is roiling financial markets. U.S. stocks tumbled again Friday, and nearly $3-trillion (U.S.) of paper wealth has been erased in the world’s equity markets in the past three weeks.

But away from Wall Street, the story of the real economy has changed little in recent weeks. If anything, it is getting better. After several false dawns, companies are finding their footing and getting ready for future growth.

A host of indicators – from home prices to jobless claims to government deficits – point to an economy that is healthier than it has been since the financial crisis. It’s getting harder, in fact, to argue that this recovery lacks staying power. The green shoots that Federal Reserve Board chairman Ben Bernanke first mentioned in 2009 finally are transforming into something more substantial. President Barack Obama’s ill-fated “Recovery Summer” tour of 2010 came three years too soon.

The improvement is showing up in places like Michigan, where some builders are now complaining of a lack of skilled workers to keep up with demand for new construction, and Ohio, where unemployment has dropped to 7 per cent from a post-recession peak of 10.6 per cent a few years ago.

“We’re investing heavily,” said Roy Getz, chief executive officer of RCO Ltd., which runs 11 Raising Cane chicken restaurants in Columbus. He said traffic at his restaurants in the Ohio capital is so strong that he intends to add three locations this year. Next year, he’s planning to expand beyond his home base for the first time by adding four restaurants in Cincinnati. Each restaurant employs about 40 people.

As the U.S. economy goes, so goes Canada’s. The decoupling that appeared to occur between Canada and its largest trading partner in the direct aftermath of the financial crisis has proved illusory, the result of a more conservative banking system that was ready to translate the Bank of Canada’s record-low interest rates into cheap mortgages.

Now, Canada’s housing boom is running out of steam. Future growth, according to the central bank, will depend on business investment and exports. Both are contingent on the strength of the U.S. recovery. There’s reason to be optimistic because Canada is overexposed to the industries that are leading the U.S. rebound: Canada produces a lot of automotive parts and cuts a lot of lumber. The Bank of Canada predicts U.S. residential investment will grow at an annual average rate of 12.5 per cent between now and 2015, which should generate export growth in Canada of about one percentage point a year, based on historical relationships.

It is still far from an economic boom, of course. The National Federation of Independent Business’s monthly sentiment index is showing signs of life for the first time since the end of the recession, but still is weak by historical standards. This week, Michael Hartnett, chief investment strategist at Merrill Lynch, called this year’s surge in stock prices the “most detested” rally of all time, while Ethan Harris, the investment bank’s co-head of global economic research, said it is too soon to declare victory over the recession. “The economy just isn’t that strong right now,” Mr. Harris told reporters in New York.

It’s true. The IMF said budget cuts in Washington could reduce the expansion by as much as 1.75 percentage points this year, bringing 2013 growth down to 1.9 per cent. “The recovery in the United States of America is gaining ground and becoming more durable,” the fund’s managing director, Christine Lagarde, told a press conference in Washington Friday. “However, the economy has a way to go before it returns to full strength.”

That mixed view is echoed by Douglass Henry, chief executive officer of Henry Molded Products Inc., a company that makes packaging material in Lebanon, Pa. “Business is going pretty well,” he said. “It’s not great, it’s not bad, it’s okay.”

Mr. Henry, who employs about 100 people making custom packaging from recycled paper for everything from wine to automobile parts, said growth is being restrained by a lack of overall confidence and uncertainty about Washington’s plans for tax and regulatory policy.

But there’s reason to think the U.S. will have its swagger back by the second half of the year. Todd Groome, who runs Dalkeith Management Group, an economic and financial consultancy in Oakton, Va., says the current fixation on stock market gyrations and high-frequency data obscures the fact that the U.S. economy has turned a corner.

“As an investor, I don’t want to be right today – I want to be right six or nine months from now when the stock is going up,” said Mr. Groome, a former adviser at the IMF, where he specialized in financial stability. Mr. Groome is more optimistic than his former employer, predicting U.S. gross domestic product could expand by as much as 2.5 per cent this year and by as much as 3.5 per cent in 2014.

Every economic rebound needs a housing boom, and the U.S. finally has one: New home sales were almost 30 per cent higher in April than a year earlier. Americans purchased automobiles at an annual rate of 15.3 million units in May, roughly the average pace between 2002 and 2010, according to Bank of Nova Scotia.

It’s politically convenient, but President Barack Obama has a point when he says the economy has created private sector jobs for more than 30 consecutive months. Furthermore, the U.S. increased its oil production by more than one million barrels a day in 2012, the biggest gain ever, according to six decades of records kept by BP PLC.

Both factors suggest consumer demand will continue to gather strength. The U.S.’s energy boom – the result of advanced technology that is allowing drillers to tap oil and natural gas embedded in shale deposits – is keeping a lid on gasoline prices, leaving more money in the pockets of consumers and lowering the input costs of U.S. manufacturers.

America’s energy boom is also brightening Mr. Henry’s outlook. The economy might only be “okay,” but that was enough to persuade Mr. Henry to set up a new plant in South Carolina, creating jobs for a few dozen people. His confidence in doing so was bolstered by the prospect of a steady supply of cheaper energy. “We’re holding our own,” he said.

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SEVEN SIGNS THAT AMERICA IS COMING BACK

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Budget crisis! What budget crisis?

Remember the Standard & Poor’s downgrade? The debt ceiling? The “fiscal cliff”? In a shift, the U.S. is entering a phase of budget calm instead of hurtling from crisis to crisis. The Congressional Budget Office last month slashed its deficit estimate for the fiscal year ending in September to $642-billion (U.S.), or about 4 per cent of gross domestic product, which would be the smallest shortfall since 2008. The across-the-board cuts in the “sequester” are part of the story, but the bigger factor is increased revenue.

An aging population still threatens to reflate the deficit through higher demands on Medicare, the health program for seniors. But that’s several years away. For now, a shrinking deficit promises to bolster confidence and lower the temperature in Washington. S&P this week changed its outlook on the U.S. to “stable” from “negative,” saying politicians have some “breathing room” to sort out longer-term budget issues.

Housing has a long way to run

Every recovery needs a housing boom, and the U.S. finally has one. Prices for existing homes are rising, and supply is relatively tight, good news for contractors – and sellers.

The cities that came to exemplify the housing bust now are leading the turnaround. Prices in Phoenix rose 22.5 per cent in March from a year earlier, according to the most recent reading of the S&P/Case-Shiller big-city price index. That was faster than technology hotbed San Francisco, where prices increased 22.2 per cent. Prices in Las Vegas climbed 20.6 per cent.

Building permits, an indicator of future construction, increased 14.3 per cent in April, to an annualized rate of 1.02 million, the highest since June, 2008.

Building activity is on the rebound because there is a lot of ground to be made up. From the beginning of 2000 to the end of 2006, single-family housing starts never were lower than an annualized 841,000 and more often topped one million. In April, the figure was 454,000. There is some concern that the recent jump in mortgage rates could snuff out demand. But that seems unlikely. Mortgage applications increased 5 per cent in the week ended June 7, even as 30-year mortgage rates crept to their highest in more than a year.

Cities and states are spending again

The U.S. should be growing at annual rates of about 3 per cent. Instead, the economy will do well to grow at a pace of 2 per cent in the second quarter. That’s because of “fiscal drag,” which mostly is represented by the blunt, across-the-board cuts that Washington failed to finesse earlier this year. But austerity is running its course at the state and local government level.

Government revenues are bouncing back, partly because of the housing rebound, which brings in property and development taxes and benefits lower levels of government more than Washington. Nominal state spending is projected to rise 4.1 per cent in the fiscal year that ends June, 2014, according to the National Association of State Budget Officers. In May, state and local governments hired more workers than they fired for the first time since June, 2009.

America doesn’t need our help

The weakest element of the U.S. economy right now is manufacturing, as weak global demand stifles exports. That’s a headwind, but not a body blow. The U.S. still is a consumption-based economy, as domestic spending accounts for more than 70 per cent of gross domestic product. And guess what? U.S. consumers are raring to spend.

Housing and automobile sales are surging. There is every reason to think this is a trend. The U.S. dollar is getting stronger, making imports cheaper. Gasoline prices are falling, saving consumers money. The manufacturing industry has stalled, but services – representing the bigger part of the economy – continue to grow. Consumer confidence readings are at their highest levels since before the financial crisis.

The jobs are coming

The Labour Department’s non-farm payrolls report – the one that gives the unemployment report – galvanizes the market’s attention. That’s a little odd, considering that the estimate has a wide margin of error and is backward looking. Todd Groome, a consultant and former International Monetary Fund Economist, prefers to watch the four-week moving average of weekly initial jobless claims, which dropped to 345,250 in the first week of June. Mr. Groome says a four-week average of about 350,000 correlates with non-farm payroll growth of 200,000 – the level needed to start significantly lowering the unemployment rate from its current level of 7.6 per cent.

Hyper-competitive

Global trade is in stasis because Europe is in recession and Chinese growth slowed to hot from white hot. Trade will rebound eventually, and when it does, the U.S. is poised to dominate. The productivity of the U.S. tradable goods sector is dramatically stronger than other developed countries, according to research by Michael Dolega, an economist at Toronto-Dominion Bank.

The country’s oil and gas boom is lowering costs for manufacturers and transportation companies, and the still-elevated unemployment rate is keeping downward pressure on wages. As a result, more and more factories are being built or expanded. Manufacturing jobs won’t ever reach the levels of decades past, but they will increase from current levels.

Small business is getting bigger

World-beating American companies such as Apple Inc., Nike Inc., Goldman Sachs Group Inc. and Deere & Co. dominate the headlines. But smaller companies are just as important to the U.S. economy, if not more so. Companies with 500 and fewer employees have created 80 per cent of the jobs this year, according to Automatic Data Processing Inc.

Smaller businesses have had it tough during the recovery. They have found it harder to obtain credit and are not as well-equipped to deal with the changes demanded by President Barack Obama’s health care policy. But there are signs these firms are about to turn a corner. The National Center for the Middle Market, a Columbus, Ohio-based research group that studies companies that earn between $10-million and $1-billion annually, polls 1,000 executives of such companies quarterly: Almost three-quarters of those executives said they are confident in their local economies in the first quarter, compared with 70 per cent a year earlier. The National Federation of Independent Business’s activity index is showing signs of life.

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