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US economy gets lift from housing, other tailwinds
Monday - 1/28/2013, 5:07pm EST
By CHRISTOPHER S. RUGABER
AP Economics Writer
WASHINGTON (AP) - The U.S. economy is a study in contrasts.
The housing, banking and auto industries are surging back to health and that has helped push the stock market to a five-year peak. Higher prices for homes and stocks tend to make people feel wealthier and spend more.
Yet unemployment remains high and hiring modest. The end of a Social Security tax cut is shrinking already flat pay. Federal budget fights have put businesses and consumers on edge.
Balanced between those tailwinds and headwinds, the economy is struggling to accelerate. By the end of this year, though, many analysts think the tailwinds will succeed in boosting growth and fueling a more robust economy in 2014.
"There is some underlying momentum," says Paul Edelstein, U.S. economist at IHS Global Insight. "It's not as strong as we would like, but it's there and it's building."
Uncertainty about government spending cuts could be defused by summer, and any spending cuts that do take effect will likely be phased in over several years. Also, for the first time since the recession ended 3 1/2 years ago, several key areas of the economy are simultaneously driving growth, which means the strength is more broadly based:
The nation has finally worked off the excesses of the housing bubble. Once there were too many homes for sale; now, there are too few to meet demand. That is pushing up home prices, construction and hiring _ trends that could accelerate U.S. economic growth in 2013 by a full percentage point, economists say.
Home prices rose 7.4 percent in the 12 months that ended in November, according to CoreLogic. It was the largest 12-month gain in six years.
Housing starts will reach 970,000 this year, according to Patrick Newport, an economist at IHS, a 24 percent jump from 2012. That's far above the 554,000 homes started in 2009 after the housing bust, though still below the roughly 1.5 million associated with a healthy market.
Construction companies will add 140,000 jobs this year, Newport forecasts, up from a scant 18,000 last year.
Struggling consumers put off car purchases for years. Now, pent-up demand is being released: Sales reached a 5-year high of 14.5 million last year. Analysts expect sales to reach 15.5 million this year, though still short of the recent peak of around 17 million in 2005.
Production and hiring at automakers and their suppliers are increasing as a result. The auto industry added 52,000 jobs last year, the third annual gain after a decade of declines.
The financial crisis hammered banks and choked off loans to businesses and consumers. But lending has been rebounding.
Mortgage and auto loans are rising. Commercial and industrial loans rose 2.2 percent in the July-September quarter from the same period a year earlier. Bank profits reached their highest level in six years that same quarter, according to the Federal Deposit Insurance Corp. Bank of America boosted the value of its mortgage loans 33 percent in the October-December quarter compared with a year earlier.
_ STOCK MARKET
The Standard and Poor's 500 stock index has more than doubled from its low in 2009 and is just 4 percent shy of its record high set in 2007.
The S&P index has jumped 5.4 percent this month in response to healthy news on housing and corporate profits. The sidestepping of the fiscal cliff at the start of the year helped, too. Higher stock prices are boosting Americans' wealth, providing more fuel for spending and growth.
Stocks are getting a lift from Main Street investors for a change. In a reverse from their behavior for most of the past five years, small investors are buying more stocks instead of selling them. Investors put nearly $13 billion into U.S. stock mutual funds in the first two weeks of 2013, according to the Investment Company Institute, a trade group for funds.
In another sign of rising confidence, investors are shifting out of ultra-safe investments such as U.S. Treasurys. The interest rate, or yield, on the benchmark 10-year Treasury bond topped 2 percent on Monday for the first time since April. Bond yields rise when their prices fall.
In the short term, the economy's headwinds are still restraining growth. They include:
_ BUDGET FIGHTS
The heaviest millstone weighing down the economy is the rift between President Barack Obama and Republicans over taxes and spending.
Further talks are expected this spring as several deadlines arrive: Across-the-board spending cuts are set to kick in March 1. Financing to run the government will expire by March 27, raising the threat of a government shutdown. And the federal borrowing cap must be raised by May 18 or the government could default on its debt.