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Is Sustained Economic Recovery Underway for the US?

Jan 11 , 2013

At present the US economy is in a critical period as it attempts to lay the foundation for recovery coming out of the most severe economic downturn since the Great Depression. While austerity worries may drag GDP growth next year, there are lots of reasons to believe the United States’ GDP will pick up the pace of recovery.

Despite numerous adverse headwinds, domestic and international, such as the debt ceiling, rising social welfare spending, the exit of future fiscal and monetary stimulus policies, and the European sovereign debt crisis the US economy is expected to display notable resilience.

First, housing market rebounds signal hope for the US economy. The housing market is an important part of the economy of the United States. As the sub-prime mortgage crisis has shown, the full recovery of the US economy depends on a strong housing market. Currently, economic signs clearly indicate the US housing market has passed the bottom of its contraction cycle and will make a positive contribution to US GDP from 2012 onwards as real estate prices in nearly half of US housing markets are rising. According to the US Commerce Department, US permits for future home construction reached their highest level in more than four years in November 2012, pointing to underlying strength in the housing market. The sustained recovery of housing market will release huge demand, which had been suppressed by the global financial crisis.

Second, US financial markets are again prosperous. Despite political controversy, like the fiscal cliff and debt ceiling, and amongst an avalanche of negative news, the recovery speed of US banks has exceeded all imagination with capital and liquidity returning to levels not seen in recent decades. The year-to-date advance of 12% in the Standard & Poor’s 500 qualifies as success and breeds confidence in US financial markets. Additionally, ten strategists recently surveyed by Barron’s see more gains ahead next year.

Third, consumer confidence has rebounded as the willingness of household consumption increases. Benefiting from record-low interest rates, household debt as a percentage of GDP is approaching 87%, down from 100% in 2009. In the future, along with the rise in real estate prices and the picking up of financial markets, total household net worth is expected to increase; thus, allowing consumer spending to increase. As consumer spending makes up nearly 70% of US GDP, increases in consumer confidence and household network will drive overall consumption and propel the US economy directly and efficiently.

Next, reviving growth in the manufacturing sector indicates an improving economy. Powered by the government’s revitalization measures in the manufacturing sector, US manufacturing unit production cost decreased by 11%, while in almost all other developed countries, manufacturing costs are on the rise. Revitalizing the US manufacturing sector, especially high-end manufacturing, will not only increase job opportunities, but also help to seize the future demands on a global scale. Such a revival in US manufacturing will ensure the US maintains its industrial competitiveness and promote a sustainable economy.

Finally, an unconventional oil and gas revolution could transform the US economy. The United States has officially begun commercial development of shale gas and shale oil. From 2007 to 2011, the average annual increase in US shale gas industry was nearly 50 percent, which caused shale gas prices to fall. While the shale oil industry is in its infancy, its development means more than shale gas itself. The economic and even political implications of this technological revolution, which won’t be completely understood for some time, are already significant. Unconventional oil and gas will not only change the US energy supply structure, it will significantly impact the US economy and geopolitics as global energy demand shifts.

As the US economy faces a sustained recovery and China prepares for an economic restructuring, newly appointed leaders in China and the US will have more time and opportunity to design top-level framework, which promotes pragmatic economic and trade cooperation, enhances coordination on major macroeconomic issues, and avoids frictions and confrontations. The future development of Sino-US relations depends on whether the new leaders of both countries can seize this vital opportunity.

Yu Xiang is a Research Fellow at the Institute of American Studies at the China Institutes of Contemporary International Relations (CICIR).


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