Finally, a Proper Start to the Recovery

The recession officially ended nearly four years ago, but the U.S. economy has yet to enter a full-fledged recovery. Fortunately, this will all start to change in 2013. The first half of the year will be sluggish to be sure, and the policymakers in Washington are partly to blame. But barring a catastrophe out of Congress in the next few months, the momentum in the economy will start to pick up noticeably in the second half of this year. This forecast is based on the recent trends in the residential construction and real estate sectors.

The trend in U.S. housing starts is a reliable leading indicator of future economic activity. The data on new residential construction is a particularly good indicator of Americans’ ability and willingness to spend money. It was a crash in this data that led to the Great recession in 2008 and 2009, and the residential real estate and construction sectors were severely damaged when the housing bubble burst. They were so damaged that the data in these sectors flat-lined for three years after the recession ended. But these sectors started to show some signs of life in 2012, and it is now quite clear they are starting to recover.

It will take a few months for the rest of the economy to follow their lead, so the growth in the overall manufacturing sector will remain subdued through the first and second quarter of 2013. The employment data will also continue to experience subpar growth during this time. But by the end of this year, the growth in the monthly data for industrial production and employment gains will start to accelerate. The overall growth in real GDP will be 2.5% in 2013, but the growth rate will jump to 4% in 2014. The unemployment rate will still be north of 7% by the end of this year, but the economy will be at or very near full employment by the end of next year.

Rising employment numbers is what generates gains in wages and incomes. Accelerating growth in wages and income drives consumption, and a sustained increase in final demand is what ultimately drives growth in manufacturing. So it will take some time for all of these effects to fall into place. The first thing that had to happen was a sustained recovery in residential construction and real estate. Now that such a recovery is underway, the rest of U.S. will soon follow suit.