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home, and a continued global economic recovery. Index (50+ indicates expansion) Q/Q % Chg (Annualized).
70 8
recovery supporting exports, Conservative esti-
manufacturing is likely to re- mates suggest that the 65 6
By these metrics, 30 -8
James Marple it seems like manu- 2000 2001 2002 2004 2005 2006 2008 2009 2010
2,500
Housing – The cyclical story that wasn’t
Traditionally, the lead role played by manufacturing in
2,000
the early stages of an economic recovery has been co-led by
1,500 the housing sector. It may not seem this way now, but hous-
ing starts have traditionally been a key leading economic
1,000 indicator, reaching a trough prior to the recession’s end and
rising steadily during the initial stages of recovery. Exclud-
500
ing the double-dip recession of the early 1980s, housing
0 starts have rebounded by an average of 20% in the twelve
1959 1964 1969 1974 1979 1984 1989 1994 1999 2004 2009 months following the end of a recession. Clearly, this reces-
Source: U.S. Census Bureau sion has been different – housing starts in February 2011
Observation TD Economics
March 25, 2011 3
www.td.com/economics
sold homes and resulting steep drop in construction did not 40% 8%
Despite their setback in February, existing home sales – un- advantage of the low rates that will persist in the coming
influenced by temporary tax credits – are 26% above their year, in order to invest in some bigger ticket manufactured
post-recession trough. As in manufacturing, pent-up demand durable products. Also, the 2011 investment tax credit will
will increasingly become a theme in the housing market. provide additional support to business investment spending.
The recession has led to a decline in the formation of new A different set of factors paints a rosy picture for export-
households, especially among the younger population, but ers of manufactured goods in 2011. First off, supply disrup-
this just means a larger pool of potential new homebuyers. tions from Japan will likely prove temporary and as the long
While housing should remain weak over the next year, it will process of rebuilding Japan begins, this could eventually
at least no longer subtract from economic activity, which is increase demand for American capital goods. Even with
a considerable improvement from the close to 1 percentage slower growth in Japan, the global economy is expected
point that it was taking away from real GDP growth over the to grow by nearly 4% this year and next. Trade and export
last several years. As home sales slowly rise and inventory growth will clearly benefit from this. Second, the U.S. dol-
is worked off, 2012 should mark the beginning of a multi- lar is expected to hold near its currently depreciated value,
year rise in residential construction, helping to pull up the as low interest rates dampen demand for dollars. What is
recovery as the manufacturing sector moves back to a pace more, the buck does not stop with the nominal exchange
of growth more in line with the overall economy. rate. Greater inflationary pressures in the developing world
Meanwhile, on the service side, consumer spending (especially China) relative to the U.S. will also enhance
growth has improved in recent quarters, but will continue to trade competitiveness by making U.S. goods less expensive
drag relative to past recoveries. As we noted above, reduc- relative to those produced abroad.
ing discretionary service spending and investing in durable
Conclusion
goods is one way households can maintain their saving rate
and gradually restore their lost wealth. While job growth Manufacturing has played a pivotal role supporting eco-
will accelerate in 2011, the high rate of unemployment nomic growth over the past year and a half, and the stage is
will keep wage and income growth from rising strongly. set for this to continue. Manufacturing’s outsized contribu-
Together, this will require American consumers to remain tion to growth, however, has not come from some herculean
thrifty, preventing a full-fledged rebound in service sector strength in the sector. Rather, a lack of engagement from
spending growth. housing construction and household service spending has
This will leave the onus on manufacturing to continue meant that manufacturing’s typical recovery has had an
fueling economic growth and driving the recovery. While outsized impact supporting economic growth. As we move
the sector is poised to soften in the short-term, conditions through 2011, this trend can be expected to continue as
are ripe for ongoing manufacturing led growth. Three forces the sector presses through some short-term challenges and
will continue supporting the sector – consumer spending on continues to grow, while foreclosures dampen the housing
durable goods, business investment in machinery and capi- construction activity, and slow income growth keeps a lid
tal, and export growth. Durable goods spending and business on service spending growth. Ultimately, until the housing
investment are highly influenced by financing conditions and and service sectors become more engaged in the recovery,
interest rates. Ongoing improvements in credit conditions manufacturing will reign supreme in underpinning it.
will allow many small businesses and households to take
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