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From Green Shoots to Flowering Buds
By: Dr. Charles Lieberman
Date: 7/20/2009
An increasing number of economic reports can be characterized as of the green shoot variety. Furthermore, some evidence of blossoming buds and flowers are now evident. A plunge in initial unemployment claims, another rise in retail spending, ongoing declines in business inventories that will need to be replenished, a smaller decline in industrial production, and most importantly, yet another rise in housing starts, led by single family homes all support the thesis that the economy is turning around. Second quarter 2009 is likely to show a modest decline when reported this week, but turn nicely positive for Q3.
The rise in housing starts is the most significant report of the past week. If the housing market were glutted with unsold inventory, builders would not be building. Without contracts and clear demand, they probably couldn't even get financing to build speculatively. Yet, starts were 2.5% higher in the second quarter than in the first, and the level of housing starts remains well below our nation's underlying rate of growth in household formation. Once job growth resumes, household formation will accelerate closer to its underlying trend, greatly reinforcing the need for new housing construction. Housing will be a small contributor to economic growth in the second half of 2009, but likely a sizeable contributor next year.
The manufacturing sector is another part of the economy turning around. Inventory liquidation remains very high, yet stocks cannot be worked down much longer. Auto sales are likely to increase, reinforced by the incentive to junk old clunkers, which will contribute further to the need to rebuild production. Exports are also likely to continue performing well in response to the rise in economic activity in Asia. Manufacturing jobs have been disappearing at a terrifying rate, but this uptick in production should stabilize industrial jobs for a while.
Risks remain. Wage and salary income growth is very weak, depressed by job losses. It is imperative that job growth resume, contributing to household spending capacity. Also, budgets are in shambles at the state and local level, so cutbacks at that level must be cushioned by Federal grants until employment growth resumes. Indeed, job growth is critical to offset many potential sources of weakness. So, the sharp decline in unemployment claims is very welcome, even if some of it is due to faulty seasonal adjustment. Still, even minimal job growth at this stage would greatly increase the likelihood that a sustainable recovery is underway.
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