Who wouldn’t be more optimistic knowing that the election campaign is in its final stage? The election result remains uncertain, but the future course of the U.S. economy is less murky than some have portrayed. U.S. housing is finally on an upswing with plenty of runway to go. Pent-up housing demand is huge, and housing starts have run at their lowest level in a half century for roughly four years, limiting supply growth. Housing affordability relative to income hasn’t been better in at least four decades. Auto sales have revived despite the rise in gasoline prices and chain-store sales appear to have sparked. And, most importantly, the jobs market is improving, though in fits and starts, as U.S. layoffs hit a 20-month low and private sector jobs are increasing.
The largest firms are starting to pull their weight, although the fastest job growth remains in small to mid-sized firms. Jobs are coming back to the U.S. as relative wage rates have declined. The pace of improvement might not be great, but the direction is clear and momentum will build if we can get a few months of rising demand under our belts. The U.S. stock market just may well be right, having jumped roughly 12% this summer despite all of the well-publicized risk and uncertainty. Looking around the world, the U.S. is a pretty good place to invest and money is pouring in from distressed Europe as well as from safer havens. Although the budget deficit and debt levels remain an issue, an uptick in growth will do much to defuse the anxiety, especially with interest rates likely to remain well below normalized levels for some time. Business productivity is good, cash balances provide a cushion and earnings are still growing.
Manufacturing, though hitting a rough patch in recent months, is in much better shape than earlier in the cycle and America’s competitive advantage has improved markedly with the decline in the dollar over the past decade. Unit labour costs have fallen as real wages have declined and productivity has improved. As well, other costs of production have declined with the boom in shale gas and oil production. States are offering meaningful incentives to entice businesses to relocate, foreign direct investment is high, and talent is readily available. Tourism has improved sharply, and trade—though contained by the global economic slowdown—stands to improve in the future, especially if China suffers no more than a soft landing, as we expect. The Eurozone crisis is still ever present, even with the ECB’s newly announced bond-buying plan. But the likelihood is that a muddle-through, drawn-out period of baby steps toward a fiscal and banking union will take the crisis from the front to the back burner. On the election front, the irony is that the Republicans, if victorious, will need more bipartisan cooperation than the Democrats if they were to win—turning the tables of the past four years. ‘President’ Romney would need the Democratic votes to derail the Affordable Care Act, the expiration of the Bush tax cuts and the Dodd-Frank financial regulations unless he wins a majority in both Houses of Congress, an unlikely event.
But, if Obama wins four more years, all of those things will continue even without Republican cooperation because they are already law. As Ezra Klein of the WashingtonPost has written, “Health care, financial regulation and tax increases are on autopilot.” Like it or not, this means that even if Romney is in the White House, chances are that much of the change he advocates will be tough to implement so, either way, the outlook is less murky than once feared.