Fate of recovering U.S. economy in the hands of the country's politicians

While American politics may present a dismal spectacle, the economy is actually showing signs of life. Certainly the most recent employment numbers sound an encouraging ...

With the seemingly never-ending U.S. election finally out of the way, it's time to assess what the outcome may portend for the giant but underperforming $15 trillion American economy.

President Barack Obama managed to eke out a second term, but he will continue to face stiff opposition in Congress. Moreover, Obama cannot be said to have secured a sweeping mandate.

The country, like Congress, remains almost evenly divided between proponents and critics of "big government."

On economic policy, getting anything done – raising the debt ceiling, giving the president authority to negotiate trade agreements, inking an annual budget and finding a fix for the U.S. government's deep-seated fiscal problems – will require compromise and good will among the political class, commodities in short supply in Washington, D.C., over the past few years.

In the short term, the biggest challenge is addressing the so-called "fiscal cliff" – the fact that, absent action by the administration and Congress, 2013 will bring a series of automatic tax increases and spending cuts amounting to almost 5% of gross domestic product. With the U.S. economy still struggling to gain traction, racing over the fiscal cliff would quickly lead to a new recession – which is why most pundits believe it won't happen.

Yet in the summer of 2011, Washington came perilously close to defaulting on the government's debt as the Republicans and Democrats proved unable to resolve their differences in a timely manner.

So the world must anxiously wait to see how the often dysfunctional American political system manages the risks posed by the looming fiscal cliff.

While American politics may present a dismal spectacle, the economy is actually showing signs of life. Certainly the most recent employment numbers sound an encouraging note.

In October, U.S. employers created jobs at the fastest pace in eight months, with the unemployment rate falling below 8% for the first time since January 2009.

American companies have added four million jobs in the past 30 months. These private-sector employment gains have been partly offset by dwindling public sector payrolls, as many cash-strapped states and municipalities have pruned staff. But public sector employment is no longer declining.

To be sure, there is a long way to go before the U.S. labour market returns to health, but progress is being made.

And the long-troubled housing sector is also turning around. After peaking at more than two million housing starts in 2004 and 2005, residential construction collapsed during 2007-09.

Annual starts fell as low as 450,000 at the bottom of the epic American real estate meltdown.

Housing starts have been slowly rising since then and are on track to reach 900,000 in 2013.

After unprecedented declines, home prices are stabilizing in the states that were at the heart of the housing downturn.

This is welcome news for Canadian lumber producers, whose southbound exports have already started to revive as America's housing market improves.

Of interest, the pace of household formation in the United States has been running far behind historical trends for the past five years.

With a steadily growing population, this can't continue indefinitely. As U.S. household formation picks up, the conditions will be laid for stronger residential investment, higher lumber prices and several years of stronger Canadian lumber shipments to the vital U.S. market.

A final piece of positive economic news comes from corporate America.

Outside of the financial sector, business balance sheets are in excellent shape, and most large U.S. companies have ample cash reserves to support future hiring and investment.

Against the backdrop of a struggling global economy and an uncertain policy environment at home, many U.S. businesses have been reluctant to spend. But this caution should ease over the next six to 12 months.

None of this is to minimize the challenges confronting America, nor to overlook the reality that the broader international economy has been losing momentum over much of 2012.

The eurozone is in recession, Japan remains weak and many emerging economies – including China and India – have marked down their near-term growth projections. Although the United States is a far more "closed" economy than Canada, global developments still have a bearing on America's prospects.

Recent forecasts suggest the U.S. economy will grow by a little more than 2% next year, similar to what's expected for 2012. But there is reason to believe a stronger rebound will take root by the second half of 2013.

Indeed, America's economy may now be positioned for several years of solid expansion, as the painful after-effects of the 2008-09 downturn and the collapse of the preceding credit boom continue to dissipate.

As the healing process continues, U.S. real GDP growth should climb to 3% or more in both 2014 and 2015. •

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