The Recovery Has Legs, But Not for Everyone

On Tuesday came the astonishing news that the Standard & Poor’s/Case-Shiller  home price had its biggest increase  in seven years. The gains were across the board—existing housing, new housing, building permits, everything.

The Case-Shiller index rose 10.9% over the past year, and prices advanced in every one of the 20 cities surveyed. Prices in housing- bust disaster areas Phoenix and Las Vegas each gained over 20%.

Also on Tuesday, the Conference Board  Consumer Confidence Index® hit 76.2, higher than economists’ expectations and its best level since February 2008.

Meanwhile, auto sales are still on track to hit 15 million vehicles this year, and U.S.-based manufacturers like General Motors and Ford have posted double-digit gains.

So, it looks as if this economic rebound is gaining steam, and will probably last,  because what we’re seeing now is a classic consumer recovery.

The missing piece is housing, whose absence over the last few years was likely the main reason the recovery from the Great Recession was the slowest since World War II. Housing is the business cycle, UCLA’s Edward Leamer once wrote, and as I said in my MarketWatch column last November, it has a disproportionate impact on the economy,

And housing recoveries usually go on for several years. Same with autos: The average vehicle age in the U.S. is a record high 11 years, so more people will have to replace those clunkers. Some icing on the cake: gasoline prices on average are $3.64 a gallon, down slightly from last year—and this is the time of year they begin to drop.

New home construction in Montgomery County, Maryland. Photo: Flickr/Sebastian Pires.

New home construction in Montgomery County, Maryland. Photo: Flickr/Sebastian Pires.

Rising home prices create a virtuous cycle: When people’s  homes are worth more, they  feel more confident and spend more money, which has ripple effects throughout the economy. Ditto for their 401ks and IRAs, whose value has risen along with the soaring stock market—up 140% from the March 2009 lows.

That “wealth effect” has been  central to Federal Reserve policy under the last two chairmen—Alan Greenspan and Ben Bernanke. Under Greenspan it created several bubbles and under Bernanke, who has taken rates down nearly to zero and has engaged in massive bond buying, it’s in uncharted waters. But in the short run, super-low interest rates and money-pumping have done their job, counteracting the austerity of spending cuts and tax increases the U.S. and other developed countries have followed.

But there’s one piece still missing: employment and income. Since 1999, median family income has fallen $5,000, and unemployment remains stubbornly high.  Official unemployment was at 7.5%, as of April, but the number who are truly out of work was much higher:

  • Long-term unemployed amounted to 4.4 million.
  • The “real” unemployment rate—including people who work part time but want full-time employment and  those who stopped looking for work—was a sobering 13.9%.
  • Labor participation was at its lowest in decade, at 63.3% of the workforce.

As time goes on and housing continues to recover, some long-term unemployed and marginally employed will get work again, often at much lower wages than before. Many Baby Boomers already have checked out of the labor market, on early Social Security or disability and food stamps. Few will return.

As I said before, this recovery is real, but it’s very, very slow. It may be too late for many who have left the labor force for good. And for much of the struggling middle class, it doesn’t feel like a recovery at all.

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