The staying power of the current rebound remains an open question, but the data du jour, at least, confirm that a recovery is underway. It’s a precarious rebound, but the economy must walk before it can run.
Both housing starts and industrial production posted higher levels last month. The annualized pace of new housing permits issued slipped, however, falling by 4.9% last month vs. December—the first decline since October and the biggest percentage drop since March 2009’s 7.1% tumble.
As our chart below shows, the housing market is a pale shadow of its former pre-recession profile. The rebounding of late is certainly encouraging, but we shouldn’t kid ourselves that anything approaching a normal recovery is imminent in this sector. Short of a complete collapse in the economy, the housing market was destined to show signs of life after three years of virtual non-stop contraction. What's unclear is what happens after the initial snapback fades. (Click to enlarge)
As our chart above reminds, much has changed in the housing market, and not for the better. The rebound so far, if we can call it that, is still a marginal event with limited relevance to the broad economic trend. The main positive is that the housing market is no longer in freefall.
Industrial production, by contrast, is closer to what we might think of as recovering. As the second chart below shows, a broad measure of industrial activity in the U.S. shows that growth has been a constant since last July. But, like housing, industrial activity is still in a deep hole relative to the days before the Great Recession.
Looking backward is encouraging, but the real test of the recovery awaits in the months and quarters ahead. Having stepped away from the brink, the economy has stabilized and started showing signs of life again. Industrial production and housing are but two examples. But the labor market has yet to offer signs that it too is set to join the party. Although job destruction is almost surely behind us, it remains to be seen how strong the job creation phase of the recovery will be. The answer will cast a long shadow on how the economy fares in the years ahead.
The natural forces of recovery are in force, supported by monetary and fiscal stimulus. But the headwind of debt, both in government and on household balance sheets, remains a potent force in keeping growth lower than it would be. The true test of just how problematic these negative forces will be is about to begin. For what it’s worth, we’re mildly optimistic that the expansion will continue. So too are a number of economists. The U.S. economy will grow at an annual rate of 2.7% over each of the next five quarters, according to 42 forecasters surveyed by the Federal Reserve Bank of Philadelphia.
Sounds good, but getting from here to there requires crossing a fair amount of treacherous economic ground. This rebound is likely to be far more prone to setback than any post-recession period since the 1930s. We already knew that, of course. The uncertainty is discovering exactly what that means over the coming months and quarters.