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America Plods Forward, Much of the World Slows

12:00 AM, May 26, 2012 • By IRWIN M. STELZER
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Meanwhile, in America consumer sentiment is at its highest level in more than four years. The recovery plods on, probably at something like a historically low 2.2 percent growth rate, which many economists are guessing will step up to close to 3 percent by year-end. Oil prices are coming down. Manufacturing output is rising, and the growth is “relatively broad-based, with healthy gains in both consumer goods and business equipment,” according to Goldman Sachs’ economists. In part this reflects an emerging trend for production and jobs to return to the U.S. due to a combination of leaner and meaner, lower-cost manufacturing operations here, and rising labor costs in China and India. A survey by Accenture consultants found that 40 percent of companies moving manufacturing operations in the past two years had moved them to the U.S., compared with 28 percent who had moved facilities to China which, however, still tops America as the preferred location for new factories.

The housing sector seems finally to be in remission. Sales of both new and existing homes rose last month by 3.3 percent and 3.4 percent, respectively, month-over-month. The supply of homes on the market is relatively low, and new home prices are up close to 5 percent compared with last year. This might be due to unaccounted for seasonal factors, but at worst it seems that new home prices have stabilized. Prices of existing homes also rose, but more modestly.

Housing starts are up, and the National Association of Home Builders reports that builders are cheerier than they have been since the housing recovery started. Beazer Homes USA, one of the largest home builders in America, reported a 50 percent jump in closings and a 29 percent rise in new orders in its recent quarter. And Toll Brothers, builders of luxury homes, moved from a loss of $20.8 million in the first quarter of last year to a profit of $16.9 million in its just-ended fiscal quarter. And so far in May its reservation deposits, which are non-binding, are up 39 percent compared with last year.      

But two cheers only. Home builder sentiment remains well below pre-recession levels, there is a long road up from what seems to be the new floor, and foreclosures (repossessions) will continue to haunt the sector. Worse still, early reports for this month suggest some slowing in both the manufacturing and service sectors, and there are few signs that the jobs market is improving: The unemployment rate is down primarily because so many workers have dropped out of the work force.

On the other hand, contagion from Europe still seems unlikely to derail the recovery, barring a panic in equity markets. Exports to the eurozone account for only 1.2 percent of U.S. GDP; money funds have reduced their exposure to the eurozone and claim to have collateralized much of the remaining risk with U.S. treasuries; the gap left as European banks pull money home to shore up balance sheets is being filled by domestic lenders; and our banks are far stronger than those in Greece, Spain, Italy, and even France and Germany.

Still, Europe has something to teach us. Political stalemate and failure to devise a blend of austerity and growth-inducing tax and structural reform is costly. Borrow-and-tax-and-spend Democrats, and Tea Party Republicans are as far apart as Frau Merkel and Monsieur Hollande. And we can see from Europe’s experience where continuation of just such a rift might lead America.

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