Rising U.S. house prices are lifting all boats: Erica Alini

Growing confidence and optimism.

 

Like a stone thrown into a still-water pond, the virtuous effects of U.S. housing revival are rippling throughout the entire economy.

The first to feel the uplifting force of rising house prices were consumers. The housing market recovery started in the second half of 2012, and by the first quarter of 2013 American families were back in the shopping malls—happily making small and big purchases, despite the hit to disposable income dealt by the expiration of a 2% payroll tax break at the beginning of the year. Consumer spending rose 3.2% during first quarter helping offset the impact of the broad automatic spending cuts known as sequester.

In the absence of any sign of growth in real wages or a strong pickup in job growth, analysts pinned the return of the American shopper on housing’s famous “wealth effect.” Climbing house prices, goes the theory, make people feel wealthier and more prone to spending. In an economy long plagued by pervasive doom and gloom, that was a welcome optical illusion.

But as the ripple effects spread to the country’s small and medium businesses (SMBs), the healing powers of the housing recovery seem to be slowly turning from placebo to actual cure. With sales of foreclosed homes at post-recession lows and housing inventories extremely tight, demand for new homes seems headed nowhere but up. That bodes well for SMBs, which account for over 80 per cent of construction employment, according to TD Economics (pdf). Related industries, such as real estate and leasing and and professional and technical services (think, say, architects and interior designers) are also dominated by the small guys and poised for handsome gains.

In May, the Index of Small Business Optimism, compiled by the National Federation of Independent Business (NFIB), recorded its second-highest reading since the recession started. Notably, a net 8% of small business owners surveyed checked the box “now good time to expand,” a four percentage point gain from April.

Wealthier-feeling consumers are also acting as a conveyor belt between the housing sector and SMBs. “The high concentration of SMBs in leisure & hospitality, professional, scientific and technical services and wholesale trade will benefit from the improvement in spending,” write TD’s Beata Caranci, James Marple and Ksenia Bushmeneva. Tellingly, an increasing share of small entrepreneurs expect higher sales, according to the May NFIB survey.

That should give the U.S. labour market a boost. SMBs account for 49 per cent of total employment nationally, according to TD. Construction alone should add an average of 40,000 a month for the next couple of years, according to the bank. It means a single industry could provide about half the 80,000 new positions the economy needs to add every month to keep up with population growth according to the U.S. Census Bureau.

A pickup in hiring, in turn, should ensure that paycheques—and, eventually, higher real wages—rather than positive thinking, feed consumer demand.

Erica Alini is a California-based reporter and a regular contributor to CanadianBusiness.com, where she covers the U.S. economy. Follow her on Twitter: @ealini.

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