A "for sale" sign is seen outside a home in New York in this June 19, 2012 file photo.SHANNON STAPLETON/The Globe and Mail
One of the bullish thoughts now circulating is that the U.S. housing market will take up where the manufacturing sector has left off – that is, as a new source of growth for the economy.
Manufacturing was one of the bright spots within the economy during the recent recovery, driving growth even as housing remained depressed.
The ISM manufacturing index rebounded to its highest level in years in 2010, and continued to expand this year before slumping into contraction territory in June and reawakening all sorts of gloomy scenarios about the broader economy.
But Josh Lehner, senior economist at Oregon's Office of Economic Analysis (hat tips to Calculated Risk and FT Alphaville), has a couple of interesting reactions.
First, manufacturing has been expanding for about three years, which is a pretty good track record from an historical perspective. And more importantly, the economy isn't necessarily doomed if housing can replace manufacturing as a major economic driver.
"Right now, the U.S. economy is in the initial phases of this handoff," Mr. Lehner said. "Should everything else go according to plan (I know!), this transition will continue to occur in the coming year or so."
He noted that the early stages of this hand off can be seen in the growth of new home construction, which is growing at a clip of nearly 10 per cent year-over-year even as manufacturing slows.
"Now, housing growth has returned but the industry is not yet doing the heavy lifting," he said.
"The much stronger growth in housing is not expected until 2013 and 2014 in our forecast, and most others as well."
We've pointed out in this space before that the stock market seems to be on side with this view. The S&P 500 homebuilding index, which consists of three U.S. homebuilding companies, is now at a four-year high after surging 59 per cent this year alone.
But is the U.S. economy near the start of a housing-fuelled boom? Maybe not.
Bill McBride, who writes the Calculated Risk blog, added that housing is usually a better leading indicator for the U.S. economy than manufacturing. But he's not so sure that the housing sector as an economic growth engine is ready to roar:
"The ISM index suggests some weakness now – mostly abroad – whereas housing suggests an ongoing sluggish recovery," he said.
Tim Duy (via Abnormal Returns), an economics professor at the University of Oregon, agrees that even with a rebound in home construction overall economic growth is likely to be subdued. In other words, the hand off from manufacturing might not be so eventful.
For one, he noted that residential construction only contributes modestly to U.S. gross domestic product. Even at the height of the housing bubble, between 2002 and 2005, the contribution averaged 0.4 percentage points.
In the first quarter of this year, the contribution was 0.42 percentage points, with the economy growing just 1.9 per cent at an annualized pace.
"So, barring the occasional pop in the data, housing is already contributing to GDP growth about what we would expect," Mr. Duy said – and secondary impacts from equipment sales and consumer activity would bump up the contribution only slightly.
As well, he argued that the housing bubble was mostly driven by price escalation.
And as home prices escalated, they fed a spending boom financed by mortgage equity withdrawal.
That growth engine is gone and doesn't look like it is coming back any time soon.
"Absent a healing of household balance sheets...I would expect overall growth to remain subdued, despite a rebound in residential construction," Mr. Duy said.
"The latter is helpful and important, but not by itself a magic bullet."