The Case For The Economy

In Friday’s CWS Market Review, I said that it’s very likely the rise in long-term interest rates is due to greater optimism about the U.S. economy. The morning’s durable goods report certainly doesn’t aid that thesis, but Bill McBride of Calculated Risk lays out the reasons why he thinks the next few years will be good for the economy.

For one, the economy has been held back by cutbacks in state and local government. That trend appears to be over. The U.S. budget deficit is also shrinking quite quickly. Next year, we have a good shot of coming in at less than 3% of GDP. In fact, given the state of the labor market, some might think that’s too austere. Also, American households have significantly delevered themselves over the past five years. Financially speaking, we’re in much better health today.

Perhaps the best variable in the economy’s favor is the housing market. Bear in mind that the general cycle of the economy is very close to that of the housing market. During the boom, so many houses were built that we had a very large amount of inventory overhang. Now it appears to be wearing off. Simple demographics tell us that despite any increase in mortgage rates, the demand for new homes will increase. McBride writes:

Starts averaged 1.5 million per year from 1959 through 2000. Demographics and household formation suggests starts will return to close to that level over the next few years. That means starts will come close to doubling from the 2012 level.

Residential investment and housing starts are usually the best leading indicator for economy, so this suggests the economy will continue to grow over the next couple of years.

Posted by on August 26th, 2013 at 10:53 am

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