Tuesday, Jan. 29, 2013 | 12:09 a.m.
WASHINGTON — The U.S. economy is a study in contrasts.
The housing, banking and auto industries are surging back to health and that has helped push the stock market to a five-year peak. Higher prices for homes and stocks tend to make people feel wealthier and spend more.
Yet unemployment remains high and hiring modest. The end of a Social Security tax cut is shrinking already flat pay. Federal budget fights have put businesses and consumers on edge.
Balanced between those tailwinds and headwinds, the economy is struggling to accelerate. By the end of this year, though, many analysts think the tailwinds will succeed in boosting growth and fueling a more robust economy in 2014.
"There is some underlying momentum," says Paul Edelstein, U.S. economist at IHS Global Insight. "It's not as strong as we would like, but it's there and it's building."
Uncertainty about government spending cuts could be defused by summer, and any spending cuts that do take effect will likely be phased in over several years. Also, for the first time since the recession ended 3½ years ago, several key areas of the economy are simultaneously driving growth, which means the strength is more broadly based:
The nation has finally worked off the excesses of the housing bubble. Once there were too many homes for sale; now, there are too few to meet demand. That is pushing up home prices, construction and hiring — trends that could accelerate U.S. economic growth in 2013 by a full percentage point, economists say.
Home prices rose 7.4 percent in the 12 months that ended in November, according to CoreLogic. It was the largest 12-month gain in six years.
Housing starts will reach 970,000 this year, according to Patrick Newport, an economist at IHS, a 24 percent jump from 2012. That's far above the 554,000 homes started in 2009 after the housing bust, though still below the roughly 1.5 million associated with a healthy market.
Construction companies will add 140,000 jobs this year, Newport forecasts, up from a scant 18,000 last year.
Struggling consumers put off car purchases for years. Now, pent-up demand is being released: Sales reached a 5-year high of 14.5 million last year. Analysts expect sales to reach 15.5 million this year, though still short of the recent peak of around 17 million in 2005.
Production and hiring at automakers and their suppliers are increasing as a result. The auto industry added 52,000 jobs last year, the third annual gain after a decade of declines.
The financial crisis hammered banks and choked off loans to businesses and consumers. But lending has been rebounding.
Mortgage and auto loans are rising. Commercial and industrial loans rose 2.2 percent in the July-September quarter from the same period a year earlier. Bank profits reached their highest level in six years that same quarter, according to the Federal Deposit Insurance Corp. Bank of America boosted the value of its mortgage loans 33 percent in the October-December quarter compared with a year earlier.
— STOCK MARKET
The Standard and Poor's 500 stock index has more than doubled from its low in 2009 and is just 4 percent shy of its record high set in 2007.
The S&P index has jumped 5.4 percent this month in response to healthy news on housing and corporate profits. The sidestepping of the fiscal cliff at the start of the year helped, too. Higher stock prices are boosting Americans' wealth, providing more fuel for spending and growth.
Stocks are getting a lift from Main Street investors for a change. In a reverse from their behavior for most of the past five years, small investors are buying more stocks instead of selling them. Investors put nearly $13 billion into U.S. stock mutual funds in the first two weeks of 2013, according to the Investment Company Institute, a trade group for funds.
In another sign of rising confidence, investors are shifting out of ultra-safe investments such as U.S. Treasurys. The interest rate, or yield, on the benchmark 10-year Treasury bond topped 2 percent on Monday for the first time since April. Bond yields rise when their prices fall.
In the short term, the economy's headwinds are still restraining growth. They include:
— BUDGET FIGHTS
The heaviest millstone weighing down the economy is the rift between President Barack Obama and Republicans over taxes and spending.
Further talks are expected this spring as several deadlines arrive: Across-the-board spending cuts are set to kick in March 1. Financing to run the government will expire by March 27, raising the threat of a government shutdown. And the federal borrowing cap must be raised by May 18 or the government could default on its debt.
Haziness around future tax and budget policy may already be restraining growth. A report from the Federal Reserve last week suggested that some employers delayed hiring late last year because of uncertainty over the fiscal cliff.
— SLUGGISH HIRING
Job gains have held steady for the past two years at about 150,000 a month. That's only about enough to slowly reduce the unemployment rate, now at 7.8 percent.
Even in sectors that are recovering, many companies aren't yet adding jobs. Some are even cutting, especially in financial services. Bank of America, for example, has shed about 15,000 jobs in the past year.
In a robust recovery, monthly job gains are usually 250,000 or more. That's what it would take to rapidly reduce unemployment and force employers to raise pay to attract workers.
— FEW PAY RAISES
For now, high unemployment is limiting pay. When employers have lots of job applicants to choose from, they have little incentive to give raises.
Hourly wages rose just 2.1 percent last year, only slightly above consumer inflation, which was 1.7 percent. Consumer spending, which drives about 70 percent of the economy, can't improve much until pay or job growth accelerates. Americans still are still reluctant to run up credit card debt to pay for extra consumption.
A temporary Social Security tax cut expired this year, reducing Americans' take-home pay. It will cost a typical household making $50,000 a year about $1,000. A household with two high-paid workers will lose up to $4,500. The drop in pay could slow consumer spending.
The Social Security tax cut, in place for two years, was allowed to expire in the deal reached between the White House and Congress to avoid the fiscal cliff.
Most economists expect the higher Social Security tax to bite hardest in the first three months of the year. But after Americans adjust to the sudden cut, its impact should lessen over time.
If federal budget issues can be resolved, the economy could start to accelerate. Analysts forecast only modest growth this year of about 2 percent. But they think growth will strengthen as the year goes on.
JPMorgan Chase, for example, forecasts that the economy will grow at an anemic annual rate of just 1 percent in the January-March quarter. But as the drag from higher taxes fades and the debt ceiling is resolved, growth could pick up to a decent 3 percent pace by the October-December quarter.
Diane Swonk, chief economist at Mesirow Financial, expects housing and other tailwinds to accelerate growth this year — as long as budget "shenanigans" don't dampen consumer and business confidence as they did in 2011.
"Could we get 3.5 percent growth by the end of this year?" she asks. "If we can get over this budget stuff, absolutely."