Workers assemble a 2011 Dodge Avenger at the Chrysler Sterling Heights Assembly plant in Sterling Heights, Mich.Paul Sancya
The world's biggest economy is stirring again.
The latest sign: U.S. factories revved up their manufacturing activity at the fastest pace in seven months in December, according to a closely-watched survey released Monday by the Institute for Supply Management. Another encouraging piece of data came from the Commerce Department, which reported that construction spending notched a small increase in November, the third such monthly gain. Investors cheered, sending U.S. stocks to fresh two-year highs on the first trading day of the new year.
While a vigorous economic recovery isn't on the horizon, it seems increasingly likely that a respectable one is. That means economic growth might actually accelerate over the course of 2011, unlike its herky-jerky pattern in 2010. It means the unemployment rate could fall in a noticeable way, even if it remains far too high for millions of out-of-work Americans. Most controversially, it means the wreck that is the U.S. housing market might show signs of repair.
The waning months of 2010 provided reasons to be hopeful. Americans are opening their wallets again, pushing retail sales back into territory last seen before the longest recession in 70 years. The number of people applying for unemployment benefits is dipping, indicating an improvement in the job market. And U.S. companies are doing a brisk business in exports, helped along by a weaker dollar.
Those dynamics are striking, since it wasn't so long ago that economists were preoccupied by the worry that U.S. growth would stall, sending the economy back into the recessionary ditch.
Now a number of forecasters see economic growth in 2011 outstripping 2010, in some cases by a considerable margin. Macroeconomic Advisers, co-founded by former U.S. Federal Reserve Board governor Lawrence Meyer, predicts that gross domestic product will increase by more than 4 per cent in 2011 (a survey of economists by Bloomberg News indicated they expected 2010, at final tally, to register growth of 2.8 per cent).
The economy is starting to see the beginnings of a "virtuous cycle," says Nigel Gault, chief U.S. economist at IHS Global Insight. Consumers are spending more, prompting businesses to hire workers and invest in equipment, which in turn spurs growth in incomes. IHS recently upgraded its prediction for 2011 to growth of 3.2 per cent from a prior forecast of 2.4 per cent.
Of course, there are still plenty of reasons for concern. A new debt crisis in Europe could rattle world markets. And the scars from the worst recession in over seven decades will take years to heal, especially for U.S. workers. Even if economic growth picks up, it will not translate into anything resembling full employment any time in the next few years, because job losses in the recession were so severe. Economists foresee the jobless rate falling only about a percentage point, from near 10 per cent currently to about 9 per cent by the end of 2011.
The overhang of debt from fighting the financial crisis and waging two wars overseas isn't going anywhere. The U.S. government is still spending well beyond its means, a problem that will get worse, not better, in the short run. A compromise hammered out by U.S. President Barack Obama and congressional Republicans to extend tax cuts and unemployment benefits will goose the economy in 2011 but swell the deficit.
"They can't keep doing this forever, but we do have some extra stimulus coming our way," Mr. Gault notes.
There's other firepower sitting on the sidelines. Through an abundance of caution, U.S. corporations have amassed a massive stockpile of cash. At the end of September, non-financial firms held 7.4 per cent of their total assets in cash, the highest percentage since 1959. If they feel confident enough to put their stash to work, it will shift economic growth into higher gear.
What about the battered housing market? Recent days delivered the dispiriting news that home prices are falling and could revisit the lows they hit last year. And there's still a huge backlog of troubled mortgages bedevilling the market.
But some point out that the housing sector is so deflated at this stage that a fair wind in the rest of the economy should help the market move in the right direction. Some indicators - the rate at which Americans form households of their own, the pace of new construction - are wallowing at lows not seen for decades.
"The only really good news is that builders don't have any inventory," says Mark Vitner, an economist at Wells Fargo Co. in North Carolina. "It wouldn't take much of a pickup in demand to generate new home construction."
Mr. Vitner doesn't foresee any improvement in housing for the first half of 2011, but says activity could pick up in the latter part of the year, led by a better employment picture. Still, he adds, housing won't look anything like "normal" for years to come.
Jobs will be the key variable for the real estate market. As long as the upturn in employment continues and mortgage rates rise only moderately, then the conditions will be in place for a gradual housing recovery, said Lawrence Yun, chief economist at the National Association of Realtors.