Why the Economy Could... Pop!

Housing is coming back. Banks are lending again. Energy is booming. A prominent Democrat argues that the U.S. economy is finally coming back to life

  • Illustration by R. Kikuo Johnson for TIME

    It is easy to imagine that because Washington is mired in political gridlock, the rest of the country is stuck too. This may explain why surveys show deep pessimism over the nation's Economic Outlook. Such sentiment made sense after the scary financial collapse of 2008, but it doesn't anymore. In fact, after five years of struggling against headwinds triggered by that collapse, the U.S. is making a surprisingly strong comeback. It's the great untold story of the summer of 2013: a combination of cyclical recovery forces and uniquely American strengths are revving up growth. The U.S. economic outlook is as strong as it has been in more than a decade.

    Yes, too many Americans are out of work and have been that way for too long. And yes, household incomes, adjusted for inflation, are still below 2007 levels. Indeed, this is the country's biggest job--to repair labor markets and get incomes moving up again. The U.S. needs growth in order to make that happen, and that's where the news is good. Confounding so many skeptics, the U.S. is actually shifting into higher gear. Growth for this year's second quarter, just reported at 1.7%, beat expectations but is well below the rate we should see at this time next year. Indeed, the Federal Reserve Board, not known for going out on a limb, recently raised its 2014 forecast for real growth to the 3%-to-3.5% range. And the country will likely see two to three more years of good growth, which would produce millions of new jobs and begin to raise incomes. This is one reason the U.S. stock market recently reached all-time highs.

    The U.S. is the only developed country with a story like this to tell. Europe, unfortunately, is facing a long period of economic stagnation. Its financial crisis came later, and southern Europe is laboring under the burdens of sick banks and weak competitiveness. Meanwhile, Japan, where the population is falling, hasn't seen meaningful growth in years and isn't likely to see it now.

    What is allowing the U.S. to rev up when others cannot? For one thing, the 2008 financial collapse and the deep slump that followed forced this country to make big changes. A severe financial crisis, whether at a corner grocery store, a multinational corporation or an entire nation, always leads to some restructuring. But the U.S. has restructured dramatically. Households have shed debt and are now ready to use their credit cards again. The banking system and the auto industry have been completely revamped. American business has become more efficient, and cost differentials with China are narrowing. U.S. manufacturing has stopped shrinking and is actually beginning to expand.

    At the same time, the U.S. continues to enjoy built-in advantages that other nations lack: a growing population and the prospect of further immigration, big and flexible housing and stock markets, the most dynamic energy sector in the world, a huge and resilient consumer market and unparalleled technology leadership.

    Now, five years after the worst economic crisis since the Great Depression, the American economy is gathering steam. Over the medium term, Americans are going to see growing job opportunities, higher wages and better asset values. To understand how this economic rebirth will unfold, it's important to understand the five big factors driving it.

    FACTOR NO. 1


    A big driver of this Economic comeback will be the housing market, which is now entering a powerful, multiyear upswing. Housing works like a trampoline. When it is pushed down far enough and long enough, it will eventually snap upward very powerfully. That move is happening now.

    You can see this in prices, which are 12% higher than they were a year ago, according to CoreLogic, an analytics and data-services firm. Each of the 20 largest metropolitan markets is registering year-over-year gains, something that hasn't happened since 2005. New housing construction and renovations don't just generate construction and related jobs. They also boost the manufacturing of appliances, pipes, wiring and other goods. And they drive services, including plumbing, electrical work, trucking and mortgage lending. This is why, according to Goldman Sachs, the housing rebound alone can add a half-point of annual GDP growth. And it could produce more than half a million new jobs a year over the next few years, according to Ameriprise Financial.

    It was the depth of housing's fall that laid the foundation for this upturn. Single-family housing starts, for example, averaged 1.5 million from 2000 to 2004, before the bubble. After the bust, housing starts plunged to an annual rate of about 500,000 for nearly three years. New-home sales fell to a third of what they had been before the collapse. In relative terms, housing hadn't been so weak since the 1930s.

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