Waiting for the "kick"

By R.A. | WASHINGTON

THE fourth quarter has been a surprisingly good one for the American economy, but many observers have been wondering whether America can keep up the pace (now estimated to be a roughly 3.5% to 4.0% annual rate of growth for the last three months of 2011) in what is likely to be a difficult 2012 for the global economy. A rebalancing America will face an obstacle to continued export growth in the form of a weakening European economy and growth hiccups across emerging markets (though if a slowdown across the emerging world coincides with rebalancing there, then import demand—including demand for American goods—might slip less than exports).

The good news for America is that several of the persistent domestic constraints on recovery appear to be eroding. Economists have been watching the housing sector for months now. Construction has been very depressed for several years: too depressed given continued growth in the population. A rise in prices, rents, and construction therefore seems likely, which could help fuel a rebound. Higher home prices should aid troubled borrowers and banks while also boosting spending through the wealth effect. And a rise in construction would buoy struggling labour markets, adding to the economy's spending power. Slowly but surely, a turnaround is emerging. Multi-family housing construction in particular is showing signs of strength, according to the latest housing start data. If this trend continues, residential investment may add to growth in 2012 in a meaningful way, rather than continue to act as a drag on activity.

There are also some signs of light in state employment data. Over the past year, most states enjoyed payroll growth, and a number of key states, including California, Florida and Texas, as well as (somewhat strikingly) Midwestern states like Ohio and Michigan. Employment growth across the country has been driven by increases in private payrolls sufficient to offset steady declines in government labour. As the economy recovers, however, states are finding that tax revenues are recovering, and the cycle of intense budget-cutting is reaching an end. Government payrolls in California fell, year-on-year, for 31 consecutive months from 2009 to 2011. In September, October, and November, however, government employment in California rose slightly on a year-over-year basis. Many other states are still shedding government jobs, but the pace of decline has fallen markedly. The removal of the drag from state and local government cuts will be another force for improvement in growth and in labour markets.

Events abroad or dysfunctional government might yet derail this recovery, but America's economy seems to be chugging along at a pace good enough to begin kicking off some positive feedback loops. Hopefully these signs of light won't prove abortive.