Economy gets lift from housing, other tailwinds

The Associated PressJanuary 29, 2013 

— The U.S. economy is a study in contrasts.

The housing, banking and auto industries are surging back to health and that has helped push the stock market to a five-year peak. Higher prices for homes and stocks tend to make people feel wealthier and spend more.

Yet unemployment remains high and hiring modest. The end of a Social Security tax cut is shrinking already flat pay. Federal budget fights have put businesses and consumers on edge.

Balanced between those tailwinds and headwinds, the economy is struggling to accelerate. By the end of this year, though, many analysts think the tailwinds will succeed in boosting growth and fueling a more robust economy in 2014.

“There is some underlying momentum,” says Paul Edelstein, U.S. economist at IHS Global Insight. “It’s not as strong as we would like, but it’s there and it’s building.”

Uncertainty about government spending cuts could be defused by summer, and any spending cuts that do take effect will likely be phased in over several years. Also, for the first time since the recession ended, several key areas of the economy are simultaneously driving growth, which means the strength is more broadly based:

Housing. The nation has finally worked off the excesses of the housing bubble. Once there were too many homes for sale; now, there are too few to meet demand. That is pushing up home prices, construction and hiring – trends that could accelerate U.S. economic growth in 2013 by a full percentage point, economists say. Autos. Struggling consumers put off car purchases for years. Now, pent-up demand is being released: Sales reached a 5-year high of 14.5 million last year. Analysts expect sales to reach 15.5 million this year. Banking. The financial crisis hammered banks and choked off loans to businesses and consumers. But lending has been rebounding. Mortgage and auto loans are rising. Commercial and industrial loans rose 2.2 percent in the July-September quarter from the same period a year earlier. Bank profits reached their highest level in six years that same quarter, according to the Federal Deposit Insurance Corp.

Stock market. The Standard and Poor’s 500 stock index has more than doubled from its low in 2009 and is just 4 percent shy of its record high set in 2007. The S&P index has jumped 5.4 percent this month in response to healthy news on housing and corporate profits.In the short term, the economy’s headwinds are still restraining growth. They include:

Budget fights: The heaviest millstone weighing down the economy is the rift between President Barack Obama and Republicans over taxes and spending. Further talks are expected this spring as several deadlines arrive: Across-the-board spending cuts are set to kick in March 1. Financing to run the government will expire by March 27, raising the threat of a government shutdown. And the federal borrowing cap must be raised by May 18 or the government could default on its debt.

Sluggish hiring. Job gains have held steady for the past two years at about 150,000 a month. That’s only about enough to slowly reduce the unemployment rate, now at 7.8 percent. Even in sectors that are recovering, many companies aren’t yet adding jobs. Some are even cutting, especially in financial services. Few pay raises: For now, high unemployment is limiting pay. When employers have lots of job applicants to choose from, they have little incentive to give raises. Hourly wages rose just 2.1 percent last year, only slightly above consumer inflation, which was 1.7 percent. Consumer spending, which drives about 70 percent of the economy, can’t improve much until pay or job growth accelerates. Americans still are still reluctant to run up credit card debt to pay for extra consumption.

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