Our latest cover story is actually two stories, comparing the state of the Canadian and American economies. View the companion piece to this story, here.
For more than four decades now, John Sharp has been able to measure the economic health of America by gross output. When times are good, demand for the portable toilets his family business furnishes to construction sites in and around Orlando, Fla., surges. And when things cool off, all he has to do is look out his office window and count the green-and-white plastic huts to calculate how deep the markets are in the dumper. During the housing heights of 2007, his company, Comfort House Inc., had just 500 scattered around its four-acre parking lot. A year later, there were more than 3,000 lined up in neat rows like soldiers.
Over the past five years, Sharp has sold off equipment, cut his staff from 33 down to 11 and dipped deep into his credit line to keep the enterprise afloat. “This recession has been the worst,” says the 71-year-old. “It’s lasted the longest, and it took the biggest cut.” But now, finally, his business’s alimental indicator is showing a real increase, with fewer than 2,000 toilets left on the lot. For the last six months, Comfort House has been turning a profit again, and he’s invested in some new trucks and hired back four workers in anticipation of more to come. Local developers are acquiring land, the architects are busy, and so are the realtors, he reports. “It’s the residential sector that’s coming back. We’re still waiting on commercial,” says Sharp. “But Florida was so high, and then we fell so darned low, I’m happy just to be in the middle.”
It’s a sentiment that’s spreading among America’s bruised and battered consumers and corporations, as an economy—which has been growing sluggishly since the Great Recession came to an official end in June 2009—has suddenly turned vibrant. Job growth, which had languished at around 150,000 per month through last summer and fall, jumped to more than 200,000 in the lead-up to Christmas, and then topped 236,000 in February, the latest figure. (The national unemployment rate dropped from 7.9 to 7.7 per cent, a four-year low.) Industrial production that month rose 0.7 per cent, almost doubling the predicted 0.4 gain. And the last time U.S. factory workers put in longer workweeks than they did in February, they were churning out guns, tanks and bombs to fight the Second World War. Building permits jumped 4.6 per cent, and housing starts are now predicted to exceed one million for 2013, up more than 220,000 from last year. Auto sales have rebounded to pre-recession levels, while retail sales are also ticking up.
And nowhere is the new-found optimism about the future of the U.S. economy more evident than in the markets. The S&P 500 index is up 109 per cent since 2009, and the talk is now about when the Dow will surpass its 2007 all-time high. Meanwhile, analysts have been forced to revise their GDP-growth projections upward toward three per cent, a full point higher than most predicted at the beginning of the year. Not exactly runaway growth, but signficantly better than the scufﬂing two per cent average post-recession. The bounce is back in American commercial life.
“There’s a palpable change,” says Mark Zandi, chief economist for Moody’s Analytics. “For the first time in the recovery, I feel like people believe. The long shadow of the recession is fading.” Job growth is now spreading across industrial sectors, and around the country, all aspects of the housing market—sales, construction and values—are “approaching takeoff,” he says. (Housing prices, up 7.3 per cent nationally during 2012, continue to rise in almost every major market.) And as net worth rises and personal debts shrink—thanks to historically low interest rates—consumers seem to have regained their taste for spending. Even the storm clouds on the horizon—the continuing eurozone upheavals and the political gridlock in Washington—no longer seem to inspire quite the same panic in the markets. “The threats seem a lot less threatening,” says Zandi.
Just how good things might still get depends on whom you ask. Money managers are verging on the giddy. “For a year and a half now, we’ve been calling the U.S. a paradise for investors,” Bill Smead, who runs an eponymous Seattle capital management firm, recently told investmentnews.com. “The U.S. system has been scrubbed clean, because we have spent the past few years getting businesses and households in order and creating an affordable housing market.”
Forecasters, on the other hand, continue to be spooked by a fitful recovery that has failed to conform to past patterns. “Normally, the crisis eases and the economy starts to breathe again,” says David Shulman, a senior economist for UCLA’s Anderson Forecast. “This time, we’ve needed a lot of mouth-to-mouth resuscitation.” His national outlook, released this month, calls for a slow ramping-up of growth to three per cent by 2014, and steady, but not spectacular, job gains that will see the unemployment rate fall to 6.5 per cent by the end of 2015. “It’s a new normal,” says Shulman. “But compared to where we’ve been, it’s looking pretty good.”
Indeed, the glass-half-full camp is growing by the day. The latest survey from the Business Roundtable, an association of CEOs, shows that 72 per cent of its members expect sales to increase over the coming six months, up from 58 per cent at the end of 2012. (Four in 10 report they are now planning to increase capital investments, up from 30 per cent just three months ago.) And Gallup’s weekly poll numbers on U.S. consumer confidence, which have been tacking upward since late 2011, reached a five-year high in February.
Less conventional, but no less accurate, are the fast-food futurists. McDonald’s is set to launch an Egg White Delight McMuffin to capitalize on what it feels is a resurgent morning-commuter market. “This year, you’ll see additional energy at breakfast,” predicts CEO Don Thompson. And Taco Bell, which saw sales rise eight per cent and added 15,000 staff in 2012, recently introduced a Cool Ranch version of its Doritos Locos Tacos (375 million sold and counting). “We believe we can add 2,000 new restaurants in the next 10 years,” Greg Creed, their chief executive told the Daily Beast website.
Then there’s the growing trend of “reshoring,” as manufacturers bring an end to the decades-long migration of jobs to China and other low-cost locales. In the past year, high-profile companies such as Whirlpool, Apple, GE, Boeing and General Motors have all made commitments to repatriate select jobs to North America. And even Chinese companies are not immune to the lure of a “made in USA” sticker, with Lenovo, that country’s largest computer maker, announcing plans to open a plant in North Carolina.
In fact, according to one consulting firm, the Hackett Group, the tipping point has already been reached, with the inflow of manufacturing jobs now eclipsing the outflow. It’s less a matter of pride or principle than money, though: rising wages and shipping costs have all but eroded the Chinese advantage. “If you’re less than about 16 per cent in cost differential, then other things, like flexibility or protection of intellectual property, become more important,” says Dave Sievers, who heads the firm’s strategy and operations practice. It doesn’t necessarily herald a return to days of yore. “You might not see a rash of jobs,” says Sievers, noting that labour-intensive, low-value-added sectors such as toys and apparel are simply shifting to places like Vietnam and Brazil. But those that are coming back are generally good ones, in sectors such as medical devices or the chemical industry, with lots of investment and high productivity. The next frontier, says Sievers, is the services sector, as similar cost pressures build on things like IT programming and financial processing.
When Tom Harrison took over the reins of the Michigan Ladder Company—America’s oldest ladder-maker and proud supplier to the White House—in 2012, he made a decision to start assembling the firm’s fibreglass and aluminum products at its plant in Ypsilanti. The work, which led to eight new jobs and brought the factory’s total workforce to 30, had always been done in Mexico or China. “We had always built the wood ones here, but imported the others,” he explains. “But I took a look at the labour and the freight costs and figured they were only going to get higher.” Harrison isn’t sure if the move has increased business; the firm’s sales dropped 40 per cent during the recession and still haven’t climbed all the way back. But it’s nice to be able to drive a positive change. “In the past, I think businesses had a tendency to overcompensate and ship too much work offshore,” he says.
It’s not to say everything is suddenly rosy in the U.S. economy. The recent news that 1.7 million American households regained equity in 2012 belies the reality that 21.5 per cent of all mortgages remain “underwater” (worth more than the current value of the homes). And workers’ wages have fallen to their lowest-ever level as a percentage of GDP, even as corporate profits have hit unparalleled heights. The impressive job gains remain just a drop in the bucket, with the unemployment rate still closer to 10 per cent in many states. And while there are officially 4.8 million Americans categorized as out of work, that doesn’t take into account the millions who have simply given up looking. Or the almost eight million people who have part-time jobs, but really want full-time ones.
And there remain doubters. Adam Hersh, an economist with the Center for American Progress, a left-leaning Washington think tank, suggests that what many observers are embracing as signs of life are just a dead cat bounce—a spurt of consumption fuelled by year-end bonuses and looming tax increases. “What we’ve got is basically stalled growth. We’re still teetering at the edge of a recession.” The fiscal crisis in Europe and a generally weak global market for U.S. exports will continue to hamper the recovery for the foreseeable future, he says. But it’s the homegrown political paralysis that has become the real stumbling block. “The U.S. has reasonable debt and deficit levels. We’ve got a lot of room to act. But politically, there’s a caustic environment.” By his estimate, whatever progress the economy is making is likely to be undermined by the punitive tax hikes and spending cuts—$85 billion in 2013 alone—that await at the bottom of the fiscal cliff. If left untouched, they stand to shave an estimated $287 billion off the country’s economic output this year, according to the Congressional Budget Office, lowering GDP growth by one to 1.5 per cent. Hersh believes the Republicans and Democrats will cut a deal: “It’s a game of chicken, and this President has a history of swerving.” But it will take months more to get there, and much of the damage will already be done, he says.
Still, others such as Mark Zandi argue that the political “drag” on the economy is more like a delay than a depth charge. The growing strength of the private sector means an almost inevitable reduction of unemployment to 6.5 per cent—the new, less ambitious definition of “full employment”—by the middle of the decade. Then there will be one last hurdle to overcome: the withdrawal of the $85 billion a month the Federal Reserve is pumping into the bond and mortgage-backed securities markets to keep borrowing costs low and spur investment. Pull back too soon and the economy might stall. Keep at it too long and inflation will climb, spurring interest-rate hikes and threatening the housing market.
But after weathering the worst downturn since the Great Depression, the risks of too much growth are hardly a big concern for most Americans. John Sharp estimates it will take at least another year of steady progress for his porta-potty business to get back to safe ground. But for the first time in a long while, he is confident it will happen. “I would say I’m optimistic. I’ve dropped the ‘cautiously,’ ” he says. It’s morning in America again. For him, it’s a matter of common scents.