Monday, February 14, 2011

Feeling Hopeful About the Recovery

Crossposted at Angry Bear.

The more I get to know this recovery, the more I’m starting to like it.

Yes, it’s been rather standoffish, giving the cold shoulder to millions of unemployed Americans. And true, through much of 2010 it was maddeningly elusive, never giving us confidence that it was here to stay. But the more data I review from the second half of 2010, the more I start liking what I see. Particularly because the data suggests to me that this recovery, while not roaring, is being built on a solid foundation, and therefore has the potential to grow into something pretty meaningful as this year progresses.

There are four things in particular that make me guardedly happy about this recovery.

1. The manufacturing sector.
I’ve spent a lot of time over the last week explaining why I am bullish on US manufacturing. The manufacturing sector is too small to make a significant dent in the US’s vast unemployment problem. However, it has been the source of some net job creation (see table), and more generally is a good indicator of the competitiveness of the US economy in terms of international trade. Which brings us to...

2. US exports.
Exports from the US did very well in the second half of 2010, which helped to give the US economy a substantial boost toward the end of the year. Best of all, this strong export performance was driven by sales to the growing, dynamic, developing countries of the world like China. That makes it likely that continued rapid growth in China and other developing countries will actually provide a noticeable boost to the US economy in 2011 and going forward. Compare this with what happened during the recovery from the previous recession. As shown in the chart below, in 2002-03 US export growth only provided a modest 0.45% boost to GDP. This time around, however, US export growth has been adding over a full percentage point to US GDP growth.

3. Business purchases of investment goods.
Unlike the recovery from the last recession, when businesses were extremely slow to begin purchasing new equipment and machinery, in 2010 business spending on things other than buildings grew at a healthy rate. In fact, investment spending in “equipment and software” (the “e&s” in the chart above) added over a full percentage point to GDP growth through 2010. The best part of this kind of spending is that it provides a much greater boost to productivity, and thus long-term economic growth, than personal consumption spending. The fact that in 2010 far more of the growth in real GDP came from business investment (and less from residential investment) than was true during the previous recovery is a very good sign for medium and long-term economic growth in the US.

4. Household financial retrenching.
The biggest drag on economic growth during this recovery has been the ongoing financial rebalancing that US households have been doing by paying down debt. But while this has meant that consumption has not grown as rapidly as it might have, it also means that this recovery is not (unlike the previous one) being built on borrowed money. Household debt levels have fallen dramatically over the past two years (see the chart below), and while arguably still higher than they should be, the fact that households have been reducing their debt in a pretty determined way suggests that households will be able to increase, and sustainably increase, their spending in 2011 and beyond as incomes grow faster.

Yes, all in all, I think there are some very nice things to like about this recovery. Now we just need it to set to creating new jobs in a serious way. But based on the strong foundations on which this recovery is being built, I think it won’t be much longer before we see meaningful falls in unemployment levels in the US.

I must say: after being very bearish on the US economy through all of the 2000s, it’s nice to finally have something hopeful to write about this surprisingly alluring recovery...

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