It’s no mystery that the U.S. economy faces a myriad of challenges. President Barack Obama (who was just re-elected into office a few weeks ago) is tasked with fixing urgent tax and spending issues that, if not appropriately dealt with, could plunge the largest economy in the world into another recession.
Real GDP growth is predicted to only be between 1.7% and 2% for this year, which is significantly lower than the initial Federal Reserve forecast of 2.4%. The bleak GDP outlook reflects the slow first two quarters and the damages to production caused by Superstorm Sandy. To make matters worse, there is the fiscal cliff issue. Analysts believe that the combination of higher taxes and reduced spending could cut into GDP and further reduce it by 1% to 1.5%
Things are starting to look up though. The most recent labor report showed that the unemployment rate was at 7.9% in October, down from its peak of 9.45%. It was also the first time joblessness has dipped under 8% since Obama first set foot in the White House.
Consumer sentiment has also improved. The Preliminary University of Michigan survey came in with a reading of 84.9, notably higher than the 82.6 forecast. This just goes to show that consumers, too, are starting to feel more confident about their financial situation.
But perhaps the most compelling evidence that growth will power on in 2013 is the stellar performance of the U.S. housing market.
According to the most recently released housing starts and building permits, construction of residential homes jumped 3.6% in October versus September. Meanwhile, building decreased 2.7%. It’s not a big deal though, as both metrics are still generally rising at a healthy rate.
You’re probably asking why housing starts and building permits are so crucial to growth. The thing about this indicator is that it relates closely to the business cycle. When housing is trending up, it usually means that growth is also getting stronger. In fact, at times, housing can even contribute as much as 20% to U.S. GDP!
Sure, the housing market probably won’t save the U.S. from the worse-case scenario, but it will power growth. The collapse in housing prices and sales was a major factor leading to the Great Recession, and it only makes sense that if we see a sustained recovery in housing prices and sales, it will hopefully pick the U.S. economy back up.