A Reason To Be Optimistic In Today's Economy

By: CNN - Posted by Giang Nguyen
By: CNN - Posted by Giang Nguyen
They say that all politics is local. Maybe all economics is local as well.

(AP Photo/Marianne Armshaw)

By Fareed Zakaria, CNN

They say that all politics is local. Maybe all economics is local as well.

A sample of Americans were asked how they rated economic conditions.

49% said things were good or excellent in the city that they lived in. That percentage drops to 37% for how Americans feel about their state; it drops to 25% for all of the United States; to 18% for Europe, and only 13% for economic conditions in the world at large.

So the more macro things get, the more despondent people feel. But at a local level — at home — things don't seem too bad.

It got me thinking about housing, the most local of all financial indicators. It's making a comeback.

Recently, we learned that U.S. house prices have now risen for the third straight month. The Case-Shiller index shows that residential prices in 20 key cities increased by seven-tenths of 1 percent in April. Sales of new single-family homes rose by 7.6% — the highest in two years.

The data highlights a trend — and it provides reason to be optimistic for the broader economy. Why?

History shows that in the immediate years following a recession, housing leads the comeback.

Take the first year of the last four American recoveries and the percentage of GDP growth that's attributed to investments in housing. In the last three recoveries, housing provides (on average) one-fifth of the nation's GDP growth following a recession. But 2009 was different; the housing bust kept home sales depressed. (Get more details in the video above)

Even looking at the second year of those recoveries, you see again positive in the previous recoveries, but negative in this one.

That looks ready to change. The latest data suggests that finally, slowly, the U.S. housing market has hit rock bottom and is heading back upwards. Vacancy rates are down, rents are up.

A recovery in housing will have big ramifications: Construction will increase; so will jobs; so will the economy.

For all the doomsday prophesies about the American economy, one reason to remain optimistic in the long run is demographics.

Accounting for births, deaths and new entrants, the U.S. has a net gain of one person every 13 seconds. That works out to about 2.5 million people every year. These people will all need places to live, and so we can actually count on a future growth in housing, construction and therefore those jobs.

Compare our demographics with that of other rich countries. Germany's population is set to decline by 170,000 this year — a trend which will hinder growth in the future. Japan's slowdown is already in large part due to its bad demographics. Its current population is 127 million but it is on pace to drop by a third by 2050. Almost one in four people in Japan are over the age of 65. In the U.S. only 13% of the population is over 65. A fifth are under the age of 14 — a guarantee that we'll have have young dynamic entrants to our workforce for decades.

The crucial factor that explains America's unique advantage is, of course, immigration.

Our fertility rates are not so different from those in Europe. What makes us demographically dynamic is that we take in about a million legal immigrants every year — more than the rest of the world put together. They are going to finally get us out of this sluggish recovery.

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