Tuesday, December 4, 2012

Positive Momentum Grows as Fiscal Cliff Nears

Home prices have now been rising for eight months, and are now up more than 11 percent from a year ago, according to the National Association of Realtors. The current supply on the market fell 1.4 percent in October, representing a 5.4-month supply, down from 7.6 months a year ago and the lowest level of supply since early 2006.

If home prices continue to rise as expected it will have two significant effects on the labor market in the coming year and years ahead. The most direct result will be the increase in U.S. home construction. Not only did new home starts jump at an annualized rate of 15 percent in September, existing home sales often also results in more construction jobs as home owners renovate before selling or after purchasing.

“Construction employment is still down by 2.2 million jobs compared to its pre-recession peak and has had virtually no recovery,” says Rob Romaine, president of MRINetwork. “Despite being less than 5 percent of the total U.S. workforce, that represents more than half of the 4.2 million jobs deficit from the pre-recession peak. Any economic activity that can increase employment for the sector will have the most immediate effect of reducing total U.S. unemployment and increasing U.S. consumer spending power.”

Rising home prices will also add to U.S. spending power in another way—increasing equity. The cumulative growth in home equity has added $760 billion in equity to the U.S. economy, nearly equal to the $787-billion economic stimulus package approved in early 2009. Yet, that program was phased in over three years, whereas growing home equity will add another $1 trillion in the next year. While home equity can’t immediately be spent on groceries or a new TV, especially if a mortgage is underwater, it can make obtaining credit easier, and can make consumers more confident to spend the cash they do have. Receipts from the holiday shopping season are just starting to be tallied but projections suggest total revenue in 2012 will grow by 4.1 percent, above the 3.5 percent average growth in the last decade.

“About 700,000 temporary retail jobs have been created this holiday season, up from last year. But retail jobs are just the last position in a long chain of jobs created by Black Friday and the weeks after it,” says Romaine. “Should projections for a strong holiday season pan out, revenues over the last five weeks of the year will spur a new round of hiring for product development, design, manufacturing, supply chain, marketing, and branding professionals and managers to create and sell products for the 2013 holiday season.”

While the economy’s momentum continues to build, several significant and fast-approaching storm clouds remain on the horizon. Lawmakers have pushed several critical decisions into the post-election season. Consequentially, before the new year, a lame duck session of Congress will need to revisit a series of temporary tax cuts set to expire, new taxes set to be levied to support the Patient Protection and Affordable Care Act (PPACA), expiring extended unemployment benefits, a 30 percent reduction in Medicare payments to doctors, and the first of eight annual $109 billion cuts in defense spending.

Collectively known as the fiscal cliff, should the laws stand as they are now written, more than $500 billion will be removed from the economy in 2013, causing a projected 0.5 percent drop in GDP. According to the Congressional Budget Office, this double-dip recession could lead to the unemployment rate to surge back to 9 percent by the end of 2013.

“No one expects the fiscal cliff to occur in its current form, but what compromises will be made are still largely unknown,” says Romaine. “Should the compromise be modest enough to prevent a double-dip recession, momentum in both the residential real estate market and consumer goods sectors bode well for unemployment to continue to decline next year as demand for professionals across industries will remain strong.”