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

By Roger Altman Monday, Aug. 12, 2013
    • Illustration by R. Kikuo Johnson for TIME

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    Now the tide has turned. On the supply side, the massive post-2008 overhang of unsold homes, which depressed prices and new housing construction, has finally been resolved. The number of homes for sale is back to its long-term average of about 2 million nationwide. It's true that there remains a big inventory of foreclosed units that have not been maintained, but that number is falling too and isn't relevant to most buyers. In other words, the excess supply is gone.

    Demand is also helping goose the market. Census Bureau data implies that the U.S. population will grow roughly 8% over the next decade, faster than either Europe's or Japan's. And the household-formation rate (people deciding to rent or buy for the first time) is snapping back. After dropping during the crisis, it has more than doubled from its nadir and is rising steadily. Pent-up formation may push it above the long-term average for some time. This means that residential investment may grow 15% to 20% annually over the next four years. The ripples of that will be felt through the entire economy.

    FACTOR NO. 2

    THE UNEXPECTED GOLD RUSH

    This is the big story that no one saw coming: the U.S. oil-and-gas sector has staged an unexpected and stunning revival--a boom, really--that carries uniformly positive implications for growth, jobs, trade and capital flows. The U.S. has always been a major oil producer, but output had been declining steadily for decades. Production peaked in 1970 and fell to a 62-year low of 5 million barrels a day in 2008. But that decline curve has reversed. Seemingly overnight, production rebounded to nearly 7 million barrels a day and is projected to reach the astonishing level of 9 million to 10 million by 2020.

    The natural-gas story is equally dramatic. Traditional gas fields were in long-term decline, and production had fallen to 48 billion cubic feet per day in 2006. Last year, the U.S. produced 65 billion cubic feet per day. Even more important, the U.S. is now believed to possess a 100-year supply of natural gas, and prices have fallen sharply, from $13 per million BTUs in 2008 to less than $4 now.

    What explains this phenomenon? The answer is uniquely American technology--a breakthrough in horizontal drilling combined with advanced forms of hydraulic fracturing and seismic exploration. The ability to drill horizontally means that one traditional vertical drilling site can generate additional wells drilled horizontally and at great depth. Together with modern forms of fracturing, this has allowed oil and gas trapped in tight rock formations to be extracted cheaply at huge volumes for the first time. To date, the U.S. is the only nation taking full advantage of this technology.

    Consider North Dakota: this quiet and often ignored state has seen its oil production skyrocket from 100,000 barrels a day only five years ago to 800,000 today. That makes it the second biggest oil-producing state in the U.S., behind only Texas. This output is coming from the Bakken Shale formation underneath the northern plains, which the U.S. Geological Survey has described as the largest continuous oil accumulation it has ever seen. The result is that North Dakota now has the lowest unemployment rate in the nation (3.2%) and a $1.7 billion budget surplus.

    The national implications are profound too. According to the consulting firm IHS, unconventional oil and gas production currently supports more than 1.7 million jobs in the U.S., and that number will nearly double by the end of the decade. Meanwhile, these new gas reserves are pushing down the price Americans pay for energy to among the lowest in the world. Cheap natural gas is a big stimulus to petrochemical production and a meaningful one for all U.S. manufacturing. And it will provide something like a tax cut for households. As utilities convert from coal-fired power to gas power--and they are steadily doing so--household electrical bills will fall. Indeed, in a few years, average retail utility bills may be $1,000 per year lower than current levels.

    Finally, the energy turnaround reduces energy imports, lowering trade deficits and generating large amounts of tax revenue for government at all levels. After decades of U.S. dependence, our oil imports have already dropped from 12 million barrels a day to 8 million and should continue to fall toward 6 million, which would be the lowest import total since 1987.

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