Five reasons for economic optimism

For Immediate Release:

September 2, 2010

Contact:Neil Irwin

Washington Post

Is there any reason for hope in this gloomy summer for the economy? A certain fatalism - that a double-dip recession is inevitable - has crept into a lot of economic analysis lately, but it may be overstating the degree to which we are in dire straits. A roaring recovery is probably not on the way, but here are five reasons that a slow-and-steady recovery is likely to continue.

Savings

The savings rate rose from 2.7 percent at the start of the recession, in the beginning of 2008, to 5.9 percent in July. That means households are farther along in readjusting their spending patterns to match their incomes than was previously realized. That should make them freer to spend more in the months ahead.

Credit

Gradual healing is underway in the financial sector, making loans more available for households and businesses. The most recent edition of the Federal Reserve's senior loan officers survey showed that more banks have eased lending standards for corporate loans. For companies with access to global capital markets, interest rates remain quite low, which supports growth.

Manufacturing

The industrial sector is actually holding up. July industrial production was up 1 percent, and early indicators show that the expansion continued last month. The Institute for Supply Management said Wednesday that its index of activity in the manufacturing sector rose in August, to 56.3 from 55.5 (numbers above 50 indicate expansion). It appears that manufacturers view final demand for their products as steady enough to keep producing.

Housing

No one is expecting home-building activity to return to pre-crisis levels for a very long time. But in July, builders began building new housing units at a paltry annual rate of 546,000 annual rate, less than half of what's needed to keep up with population growth. The housing market just can't contract that much more. When housing starts fell from a 2.3 million annual rate in early 2006 to the low of 477,000 in April 2009, it was a major drain on the economy, but a decline of that scale is now mathematically impossible.

Trade

A steep rise in imports dragged down the economy in the second quarter to an unprecedented degree. If the trade deficit had not widened, the gross domestic product would have grown at a healthy 5 percent annual rate. With many other world economies doing better than the U.S. economy right now, exports may be set to rise more than imports in the coming quarters, which would help domestic growth.

 

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