Jumat, 22 Maret 2013

The case for optimism

This post is the optimistic counterpart to my post yesterday, Why is everyone so gloomy? Here are 18 charts, in no particular order, that document the economy's ongoing recovery. I think this amounts to a persuasive body of evidence supporting my belief that the economy is recovering, and growing, and likely to continue to do so for the foreseeable future. It's not a robust recovery, to be sure, but it is definitely a recovery and things are indeed getting better.

Housing starts as of February were up fully 70% from their 2010 year-end level. That comes after starts fell to their lowest level in recorded history, where they remained for almost three years. This allowed a huge reduction in the supply of new housing which likely corrected for the excess of housing that was built in the heydays leading up to the bursting of the housing bubble. And despite the significant increase in new starts, the level of starts remains extremely depressed from an historical perspective. There is lots of room for further increases in the years to come. In anticipation of this, the stocks of major home builders are up 270% from their recession-era lows.

The current recovery was the only one in post-war history that began without a recovery in residential construction. With construction spending now increasing, this will provide important support for the economy in coming years. If residential construction returns to the levels that prevailed prior to the housing bubble, it could add as much as 3% to the growth of real GDP.

U.S. industrial production has almost fully recovered to its previous peak after suffering its worst decline in modern times. Production of business equipment is now at a new all-time high.

The unemployment rate is still high, and the economy needs to generate about 2 million more jobs just to get back to pre-recession highs, but as the chart above shows, jobs today are growing at about the same pace as they were in the mid-2000s.

A recession has never started without there first being a significant rise in unemployment claims. Today, claims continue their 4-year downtrend, strong evidence that the jobs market is getting healthier by the day.

Corporate profits are very close to all-time highs. The corporate sector has never been so profitable. Unfortunately, corporations lack the confidence to fully invest those profits, and the federal government has obliged by effectively borrowing from the capital markets just about all the savings that corporations have contributed over the past four years. But should confidence return, and policies improve (e.g., a reduction in the corporate tax rate, which is the highest in the developing world), corporations have the wherewithal to stage a powerful investment-led recovery.

Bank lending standards are still much tighter than they were before the recession, but it is a myth that businesses are unable to get loans. As this chart shows, bank lending to small and medium-sized business has been rising at double-digit rates for more than two years. On the margin, banks are more willing to lend, and businesses are more willing to borrow. This is a good barometer of increased business confidence in the future.

After a decline in the third quarter of last year, this indicator of business investment has turned back up, and is very close to attaining a new high level.

Housing prices are up as much as 10-12% in the past year. The inventory of unsold homes is close to its lowest level ever. Bidding wars are replacing foreclosures. The housing market has had plenty of time to adjust, and is now in a general upturn.

Consumers have made plenty of adjustments, with the result that households' financial burdens are at historical lows and consumer credit delinquencies are also at historical lows. This is a very encouraging development.

Household net worth is now at a new all-time high, thanks to rising stock prices, increased household savings, reduced debt, and rising home prices. All very healthy trends.

Thanks to new fracking technology, U.S. crude oil production is exploding to the upside, up almost 23% in just the past year. This is a huge industrial revival that has created boom conditions in North Dakota and Texas. Along with a gusher of new oil has come an abundance of natural gas, whose price has fallen relative to oil by orders of magnitude. U.S. industry now enjoys some of the world's cheapest energy. It's difficult to underestimate just how important this is to industrial America. It's a new age of energy abundance that is changing the face of entire industries. We are still in the early stages of this new boom.

This chart shows an index of key indicators of financial market liquidity and overall health. Markets have now fully recovered from the devastation of the financial crisis of 2008. Healthy and liquid financial markets are a necessary condition for a healthy and growing economy.

The recovery is not limited to the U.S. Global equity markets have rallied significantly in recent years (up almost $30 trillion), and are now only 11% below their pre-recession high.

Adjusted for inflation, retail sales are well into new high territory, having risen 3.2% in the past year.

Of course, there are still many problems the economy has to contend with. Monetary policy could become excessively easy if confidence returns and the Fed fails to take timely and aggressive steps to tighten policy. Fiscal policy continues to burden the economy with a very high level of spending relative to GDP, very high marginal tax rates, and the highest corporate tax rate in the developed world, although things are improving somewhat on the margin. Regulatory burdens are extremely high, with Dodd-Frank placing heavy burdens on the financial industry and the implementation of Obamacare threatening jobs and health coverage for millions of people across the country. Unemployment is still very high, and the labor force participation rate is disturbingly low. The unfunded liabilities of our major entitlements programs (e.g., Social Security, Medicare) are gigantic, and the current pace of spending growth is unsustainable over the long run. Public sector unions enjoy benefit packages that are bankrupting cities nationwide. Geopolitical tensions are rising in the Korean Peninsula and in the Middle East. Our federal deficit is still a shocking 7% of GDP and total debt held by the public is approaching an astonishing 80% of GDP.

And yet the private sector has dealt with the shock and disruption of a major recession and has survived, and is slowly but surely rebuilding the economy in spite of all these negatives.

It never pays to underestimate the ability of the U.S. economy to overcome adversity and grow. That's why I remain optimistic, especially because I see that markets are still obsessed by the negatives.

UPDATE: here's one more chart that I should have included before:

Auto sales have enjoyed a very strong recovery, having risen at an annualized rate of 14% from their low four years ago. Government attempts to "jump-start" sales in 2009 only caused a temporary uptick that was later reversed. The gains since then have been entirely "organic," driven largely by growth in hirings and incomes, increased confidence, and easier access to credit. No one expected sales to rebound this fast.

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