PF Blog

An Old-Fashioned Business Cycle Recovery

By: Bill Wood, MoldMaking Technology's Economics Editor
4. April 2013


By now the pattern has become all too familiar. In each of the past three years the economic data from the first quarter has shown some promise that a stronger pace of growth was imminent. The stock market escalated and the employment data firmed. A self-sustaining recovery looked possible. But by summertime the pace of growth turned sluggish. And labor market cooled, the stock market fizzled, and the pace of expansion remained sub-par.

And there was always a good reason for the sluggishness that ultimately prevailed: the tsunami in Japan; surging energy prices; and the ineptitude of policymakers in Washington. Analysts are now referring to this as the "spring swoon." And some are suggesting that we will likely have another swoon in 2013.
To be sure, we already have an excuse for subpar growth this year. The latest bout of fiscal austerity within the federal government caused by the sequestration will trim about 1.5 percentage points off of GDP growth in 2013. The most noticeable effects of these cuts in federal budget will be felt in the second and third quarter of this year. So I suppose there is good reason for investors in the stock market and companies that are considering adding new workers to be cautious.

But I think this year will be different. Budget cuts in Washington will impede overall economic growth, but growth in the private sector will continue to improve. And for the first time in the past four years the recovery is proceeding in a traditional manner. We are finally getting an old-fashioned recovery in the business cycle because this time around it is being led by growth in the data on housing starts.

Increasing housing starts, a rising stock market, and low interest rates used to signal the end of a recession and the beginning of the next expansion phase of the business cycle. Interest rates have been at historically low levels for several years now, and the stock market has completely rebounded. But until just recently, the housing starts data languished. The result was sluggish economic growth. But now that the recovery in the housing and real estate sectors is in full swing, more robust economic growth is only a quarter or two away.


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