An upside-down recovery goes back to square one

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The US recession may have ended in June 2009, according to the official arbiter of the business cycle. But by all signs, the recovery is just beginning.

Expected fourth-quarter growth of 3 percent to 3.5 percent is already being dismissed as another flash in the pan: been there, done that. After all, in late 2009 and early 2010 the US economy produced three consecutive quarters of real gross- domestic-product growth just shy of 4 percent, only to see it fade. Real GDP rose less than 1 percent in the first half of 2011.

What's different now? For starters, the composition of current growth more closely resembles that seen in the early stages of recoveries, according to Joe Carson, the head of global economic research at AllianceBernstein LP in New York.

"Consumer durables and housing accounted for roughly half of the increase in real GDP during the fourth quarter," Carson says, based on his projections.

Housing? Surely a case of, been down so long it looks like up?

Not really. Multifamily construction is giving the housing sector a boost. With Americans opting for renting over buying, the apartment vacancy rate fell to a decade low of 5.2 percent last quarter, according to Reis Inc., a commercial real-estate research firm.

The stock market is smelling the turn, as well. Homebuilders, along with building- and construction-product makers, were the best performers in the Standard & Poor's 500 Index in the fourth quarter. The S&P Homebuilding Index rose 46 percent compared with an 11 percent increase for the S&P 500.

"˜Last shall be first'

Homebuilder sentiment is improving, which is tantamount to saying they see better sales, traffic and prospects for 2012. The inventory of new homes has been whittled down from a peak of 572,000 in July 2006 to 158,000 in November, the lowest in the 50-year history of the series. And while distressed sales are only keeping up with the flow of seriously delinquent loans, unless the government does something stupid -- or more stupid than what it already has done, only delaying the inevitable -- home prices may be reaching a level where buyers, be they homeowners or speculators, are willing to take a flyer.

Because of its interest-rate sensitivity, housing -- together with consumer durables -- drives the business cycle. The Federal Reserve lowers official rates during a recession. Other interest rates, including those on mortgage loans, follow suit. Residential real estate is quick to respond -- unless, of course, this time is different (see Rogoff and Reinhart) and the overhang from a burst-bubble debt crisis prevents it.

Consumers, who defer purchases of items such as cars, appliances and electronics during bad times, resume their spending when the worst is over.

Not so this time around. The current recovery has been completely backward, driven by exports and investment, Carson says. The export contribution has been "historic," accounting for 45 percent of GDP growth compared with a typical 10 percent in the first nine quarters after the end of a recession. Add in investment, and the two sectors account for the entire growth of GDP during the period.

These "late-cycle sectors have been adding because the world economy is being driven by emerging markets rather than US consumers," he says.

The consumer seems to be coming back, having reduced his debt relative to disposable income to manageable levels. Finally the employment picture is starting to look up.

Born to grow

Weekly jobless claims have been telegraphing the improvement for a couple of months. Yet when the Bureau of Labor Statistics first reported a 0.4 percentage-point decline to 8.6 percent in the November unemployment rate (later revised to 8.7 percent), the naysayers were quick to point out that the drop was for the wrong reason: Many unemployed workers had stopped looking for work and were no longer counted as part of the labor force.

The reason doesn't matter. The jobless rate moves in big, broad sweeps -- in both directions. There can be some give-back, especially after big, single-month moves. But once a trend is established, it usually doesn't reverse.

This isn't to say the economy is about to experience a typical post-recession growth spurt. But it could be embarking on what economists like to call a self-sustaining recovery ("Look Ma, no hands"), even in the face of Europe's debt crisis. Recession in the European Union alone won't derail the recovery as US exports to the region account for less than 2 percent of GDP.

Mort important, an economy's natural tendency is to grow: one of the bi-products of the free-enterprise system. The incentive to produce is to profit. That revenue provides the means to consume. Unless the government throws some nasty stuff at it in the form of higher taxes, burdensome regulations or restrictions on personal freedom, the economy will thrive and prosper.

Sometimes it just takes longer.

Caroline Baum
Caroline Baum, author of "Just What I Said," is a Bloomberg View columnist. The opinions expressed are her own.

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