Economy on a steady course despite job scare

While Wall Street and Washington were obsessing over recent signs of softening in the job market and a flare-up of the European debt crisis, much of the rest of the economy has been chugging along showing improvement.

State governments reported Tuesday that their revenues from sales and income taxes are on course to exceed pre-recession levels for the first time in five years — a clear sign that the recovery remains on track.

Various other reports show that manufacturing and the nation’s vast services sector have continued to grow despite the spring slowdown in hiring. Household wealth has started to increase again with a revival in housing prices this spring, and analysts say a long-awaited recovery in the housing market may finally be under way.

“We’re in the early innings of a housing recovery,” said Eric S. Belsky, managing director of Harvard University’s Joint Center for Housing Studies. “Rental markets have turned the corner, home sales are strengthening, and a floor is beginning to form under home prices.”

The importance of the turnaround in the housing market can’t be overemphasized, economists say. Its extreme weakness since 2007 has been at the root of many of the nation’s other problems, including the foreclosure crisis, declining household wealth and job immobility.

With mortgage interest rates at record lows and housing prices the lowest since the 1990s, conditions are more favorable for homeownership than ever before. Economists say housing appears poised to contribute to economic growth again for the first time since 2006.

“Surveys consistently find that the overwhelming majority of young adults plan to own a home in the future, but many would-be buyers have stayed on the sidelines waiting for the job outlook to improve and house prices to stop falling,” Mr. Belsky said.

These “fence-sitters” will move quickly to buy homes once they perceive that prices and interest rates have bottomed out, he said, although he cautioned that any major setback in the job market or larger economy could quash the budding housing recovery.

“We believe that we are now at the start of a sustainable, self-reinforcing recovery in single-family construction,” said Mark Vitner, an economist with Wells Fargo Securities, although he said he expects gains to be modest and slow.

The uptick in housing already has yielded a rare pickup in household wealth, which rose 3.8 percent in the past quarter, according to the Federal Reserve, owing to a rise in home prices after years of deep losses caused by the 35 percent average drop in home prices since 2006. Homes are the main source of wealth for the nation’s middle class.

The $2.8 trillion rise in household wealth last quarter also reflected a boom in the stock market, which has been reversed in the past month as global markets reacted to the deepening debt crisis in Europe and global economic slowdown.

The volatility in the stock market continued Tuesday, with the Dow Jones industrial average surging by 163 points, retracing a similar-sized loss on Monday.

The revival of housing promises to relieve a major problem plaguing state and local governments — the collapse of revenues from property taxes — which has forced governments across the country to impose millions of layoffs and cut deeply into municipal budgets, slowing the economic recovery.

States are showing a revival of revenues caused by a pickup since 2009 in sales and incomes taxes, which are their main sources of revenue. Those revenues are expected to hit a milestone this fiscal year and surpass their pre-recession peak of $680 billion by $10 billion, according to a survey of states released Tuesday.

“We’re definitely seeing stability,” said Scott Pattison, executive director of the National Association of State Budget Officers. Only eight states were forced to close unexpected midyear budget gaps this year, compared with 39 states two years ago, in sign of the improving trend.

The steady rise in state revenues is providing relief to arguably the nation’s second most distressed sector after housing, enabling governments to curb layoffs and consider selective increases in spending for the first time in years. States overall are planning a 2.2 percent rise in spending next year, the budget officers group said.

Meanwhile, surveys of the nation’s manufacturing and non-manufacturing sectors by the Institute for Supply Management last week showed that they continued to grow in May despite a hesitancy to hire among businesses worried about potential fallout from the slowdown in China and recession in Europe.

The Fed also reported last week that its surveys showed that modest growth continued across the country. Fed Chairman Ben S. Bernanke indicated in testimony that he wasn’t jarred by the recent slowdown in job growth, which he predicted after job gains unexpectedly surged this past winter under the influence of unseasonably warm weather.

“Although the jobs numbers were undeniably soft, we think there are conflicting signals” suggesting the economy is doing better than many people think, said Joseph G. Carson, U.S. economist at AllianceBernstein.

He said he thinks the economy is in transition from a recovery led by exports and business investment to an expansion driven by housing construction and consumer spending.

While wage and income growth has been tepid, consumers are benefiting tremendously from extraordinarily low interest rates, enabling them to shed debt and lower their monthly debt payments, he noted. That has the effect of increasing buying power without an increase in income.

Mortgage refinancings, in particular, are surging with 30-year mortgage rates having dropped to record lows of less than 4 percent in recent weeks.

Mr. Carson noted that the current scare prompted by dwindling job growth isn’t the first for the U.S. economy. The same thing occurred last summer, he said, and at that time, many forecasters and pundits proclaimed “the U.S. economy was on the verge of a dramatic slowdown or double-dip recession.”

Those predictions proved to be far off the mark, he noted.