For the past three years, the U.S. economy has been prone to bouts of seasonal flu in the Spring. In 2010 and 2011 it was because of new outbreaks in the eurozone debt crisis. This year, economists predicted the main source of pain would be a reinstated payroll tax and $85 billion-worth of automatic sequester cuts approved as part of the fiscal cliff.
So far, though, the economy is holding up better than foreseen. After a streak of bad economic releases in March, April has delivered some pleasant surprises. The latest jobs report was a lot stronger than expected: the economy added 165,000 positions—ahead of the consensus forecast of 140,000—and unemployment dipped to a four-year low of 7.5%, which, for once, reflected a hiring pick-up rather than a decline in the workforce participation rate. Even better, the release came with massive revisions to earlier numbers: March, it turned out, added 130,000 jobs (not a dismal 88,000 as previously reported) and February as many as 332,000. More good news: April retail sales edged up 0.1%, which is no stellar performance, but well above the expected 0.3% contraction. Also, consumer confidence didn’t plunge: it held roughly steady according to the University of Michigan Index and jumped up according to the Conference Board, which uses a different gauge. Even small businesses, which have been fretting about the impact of upcoming health reform legislation, are feeling upbeat.
Where’s this resilience coming from? With Chinese growth slowing and Europe still in the doldrums, the force, it seems, comes from within—from consumers, to be precise. Americans keep on spending, including shelling out for big-ticket items: auto sales were up 1% and electronics and appliances 0.8%. It helps that gasoline prices are low, and people spent almost 5% less in April filling their gas tanks than they did in March—that likely freed up some cash for other purchases. But the biggest tailwind is likely the housing market. The S&P/Case-Shiller Home Price Index showed February house prices were up by an average of 9.3% in the 20 American cities it tracks compared to the same period a year ago. Americans have noticed: the University of Michigan Index reported the largest share of consumers since late 2007 are saying that home values were heading up. Rising home prices, in turn, are helping to mend families finances battered by the crisis and putting many people in the mood for shopping.
There had been some warnings, earlier in the year, that the so-called “wealth effect”—whereby home owners feel wealthier and are inclined to spend more when home prices climb—would be muted in the post-financial crisis housing rebound. So far, though, housing’s mood-boosting effect seems to have been enough to counterbalance the drag associated with higher payroll taxes. (Undoubtedly, the recent stock market rally certainly has some Americans feeling a lot richer as well, but since average U.S. families tend to have most of its wealth tied up in real estate rather than the financial market, the impact of housing is probably the more relevant one.)
Another interesting detail: in April construction employment was virtually flat compared to March, but retail jobs registered a noticeable bump up. What happened? Likely, that was the housing market lifting consumer demand, which in turn drives hiring decisions in the retail sector—despite the fact that higher payroll taxes have put a dent in disposable incomes. On the other hand, fiscal belt-tightening seems to have offset the housing stimulus effect on employment, with the sequester leading to decline in the commercial sector despite a pick-up in residential projects.
In the short-term, this is all good—including for the sputtering Canadian economy, for which private demand from the U.S. is much more important than government spending. However, going back to the old model of consumption-driven growth underpinned by the housing market, all this recent positive economic news shouldn’t get anyone breaking out the champagne. It just doesn’t look like a sustainable option in the long-run.
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.