There's New Hope for US Recovery as Early Cyclical Sectors Rebound

Something is changing in the US economic recovery. Housing and autos are finally starting to wake up from a recession-induced slumber, and the timing couldn’t be better.

Since the recession ended in mid-2009, the US economy has been primarily driven by exports and investment. These two sectors, which traditionally drove growth later in a recovery, have recently started to lose steam amid the slowdown in global trade and uncertainty about US fiscal policy, as the display below shows. In contrast, housing and autos, which have always been early cyclical leaders in economic recoveries, are now starting to recover after being stuck in the fallout from the downturn.

US Growth Drives Begin Transition

To date, the strength of exports and investment alongside the weakness of housing and motor vehicles was an unusual combination. More than two years ago, we described this as a new mix of economic growth drivers. It was just what the economy needed.

At the time, emerging-market economies were growing rapidly, allowing a competitive US manufacturing sector to increase sales abroad. This spurred a strong export cycle, as well as investment spending gains for the US.

Meanwhile, US households were saddled with debt from the credit bust. Because of this, domestic sectors such as motor vehicles and housing weren’t capable of driving the recovery.

Today, US households have made great progress in reducing their debt burden, repairing their balance sheets and improving cash flows. Against this backdrop, I expect an imminent shift back toward the more traditional early cyclical sectors that have powered recoveries in the past. There’s a lot of pent up demand waiting to be released.

Motor vehicle sales had fallen to 10 million units a year in mid-2009, at the start of the economic recovery, the lowest level of any starting point since 1975. Progress has been uneven, but the cumulative gains to date now exceed the rebounds in each of the last three US recoveries.

The same goes for housing. When the recession ended, the US real estate market was hobbled by a massive overhang of unsold homes and even more houses were stuck in the foreclosure pipeline. Now, the pace of the rebound in residential construction (from depressed levels) rivals that of the previous three economic recoveries.  And there’s still a long way to go, since new construction is only a little more than half of normal levels of activity.

A recovery in these domestic industries should support more robust and sustainable economic growth by helping to augment job and wealth creation, while fostering improved flows of credit and leading to increased business and consumer confidence. And if the transition of the US economy back toward early cyclical growth drivers continues, I think it would also mark an important new stage for global growth by allowing the US to resume a greater leadership role in the world economy, at a time when other major regional economies are facing significant challenges.

The views expressed herein do not constitute research, investment advice or trade recommendations and do not necessarily represent the views of all AllianceBernstein portfolio-management teams.

Joseph G. Carson

Director—Global Economic Research
Joseph G. Carson joined the firm in 2001. He oversees the Economic Analysis team for AllianceBernstein Fixed Income and has primary responsibility for the economic and interest-rate analysis of the US. Previously, Carson was chief economist of the Americas for UBS Warburg, where he was primarily responsible for forecasting the US economy and interest rates. From 1996 to 1999, he was chief US economist at Deutsche Bank. While there, Carson was named to the Institutional Investor All-Star Team for Fixed Income. He began his professional career in 1977 as a staff economist for the chief economist’s office in the US Department of Commerce, where he was designated the department’s representative at the Council on Wage and Price Stability during President Carter’s voluntary wage and price guidelines program. In 1979, Carson joined General Motors as an analyst. He held a variety of roles at GM, including chief forecaster for North America and chief analyst in charge of production recommendations for the Truck Group. From 1981 to 1986, Carson served as vice president and senior economist for the Capital Markets Economics Group at Merrill Lynch. In 1986, he joined Chemical Bank; he later became its chief economist. From 1992 to 1996, Carson served as chief economist at Dean Witter, where he sat on the investment-policy and stock-selection committees. He received his BA and MA from Youngstown State University and did his PhD coursework at George Washington University. Location: New York

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