MacroScope

More than six years after its spectacular collapse, the U.S. housing market – the laggard of the struggling economic recovery – may be poised for pickup, driven in part by an upswing in remodeling, Bank of America-Merrill Lynch economist Michelle Meyer thinks.

Gains are likely to be modest at first, and are subject to volatility since overall economic growth may well slow in the second half of this year. Also, given the deep hole housing has fallen into, the market is still far from a robust recovery, Meyer wrote in a note to clients drawn from recent research.

Still, some evidence points to the beginnings of an upswing. For one, data already indicate a rebound in spending on renovations. Remodeling will pick up steam as investors convert foreclosed properties into rentals, and homeowners who have held off doing repairs or additions decide the time is ripe, Meyer said.

Stronger housing markets are also likely to be supported by a reversal of declines in household formation, which slowed dramatically as graduates opted to live at home or as people who lost their homes through foreclosures went to live with relatives or friends, she said.

Meyer and her colleagues also see an unleashing of pent-up demand for homes among homeowners who have put off the voluntary move up to a larger or more expensive home:

How bad is the U.S. employment situation? The Labor Department’s tally for March, which showed only 120,000 new jobs were created, raised doubts about the sustainability of a recent pick up in job growth. But to get a broader sense of what things are really like it helps to put things in a longer-term perspective.

Even with the 3.6 million new jobs created during the recovery, some 5 million more are needed just to make up for all of the jobs that were lost during the Great Recession. At March’s pace, it would take nearly four more years to get there – and that’s not accounting for population growth.

If job growth remains at tepid clip of around 150,000 a month, it would take five years for the jobless rate, which registered 8.2 percent in March, to fall to 6 percent, according to Atlanta Federal Reserve Bank economist Julie Hotchkiss.

Avast ye swabs! Maybe the disconnect between improving labor markets and sluggish economic growth that  has Federal Reserve policymakers scratching their heads makes sense if viewed through a pirate’s spyglass – with a lot of latitude, according to a top Fed official.

St. Louis Fed President James Bullard sees the 8.3 unemployment rate continuing to fall at a sprightly pace. That’s even though Fed Chairman Ben Bernanke has fretted the jobless rate’s precipitous tumble since August, when it was 9. 1 percent, doesn’t square with the relatively modest pace of growth.

Bernanke has explained that according to a rule of thumb that has currency among economists, Okun’s Law, the jobless rate shouldn’t  fall much if growth doesn’t exceed the economy’s long-run average. So he and others at the Fed find it hard to be confident a growth rate of around 2 percent – the forecast for the first three months of the year – can do much to boost hiring.

Suddenly, it’s the two lone doves who find themselves on the outside of the Federal Reserve’s policy consensus. Until recently, it was the hawks who were in the minority. But minutes of the central bank’s March meeting suggest policymakers are becoming less keen to launch a fresh round of monetary stimulus as the U.S. economy improves.

They key difference came from the minutes’ characterization of officials’ inclinations toward a third round of quantitative easing or QE3.

Here is what the January minutes had said:

A few members observed that, in their judgment, current and prospective economic conditions – including elevated unemployment and inflation at or below the Committee’s objective – could warrant the initiation of additional securities purchases before long. Other members indicated that such policy action could become necessary if the economy lost momentum or if inflation seemed likely to remain below its mandate-consistent rate of 2 percent over the medium run.

While Federal Reserve Chairman Ben Bernanke was noting the recent strengthening of the U.S. job market is “out of sync” with an otherwise slow recovery on Monday, economists at the New York Fed drew attention to the jobless rate itself by saying that some big changes lie ahead for U.S. labor.

The jobless rate may fall faster than expected to less than 5 percent in five years’ time, the economists said in the first in a series of posts but that seems likely to be due more to the fact that fewer people will be in the labor market than to future job creation.

The post notes how, between 2008 and 2012, the employment to-population ratio had a different pattern than in previous economic cycles, with the unemployment rate falling “because the participation rates declined substantially”. Given the U.S. aging population, with 10,000 baby boomers turning 65 each day, this rate is likely to decline even more. The argument has interesting implications, including a potential decline in the usefulness of the jobless rate as a gauge of well-being.

Spend more now, save more later. It may sound somewhat counterintuitive, but it’s the best prescription for getting out of deep economic ruts, according to a new paper from Bradford DeLong and Lawrence Summers, former economic policymakers now in academia.

In particular, the economists focus on the notion of hysteresis, which is a state where a prolonged period of economic retrenchment and high long-term unemployment creates new types of structural barriers to reintegrating the jobless back into the labor market. It thereby does lasting damage to the economy’s potential rate of growth.

Against this backdrop, DeLong and Summers argue a highly stimulative fiscal policy can actually reduce the long-term debt burden. They argue vigorously against policies of austerity, saying they are self-defeating and ultimately may actually worsen a country’s debt profile.

U.S. Treasuries have taken quite a battering this week, and there has been no shortage of explanations from market pundits. For some, the downturn reflects an improving economy and the pricing out of expectations for further monetary easing from the Federal Reserve. For others, the market is playing catch up after eyeing firmer inflation numbers and a better if still anemic employment backdrop.

The Fed’s statement this week lent itself to a hawkish interpretation since what few changes were made appeared positive. The bond market responded in kind, adding to a selloff that has seen ten-year note yields rise nearly 40 basis points in just over a week. George Goncalves at Nomura describes the price action:

U.S. Treasury yields had a seismic break and have finally moved this week, and boy did they move. The market blew through the range it had held for the past four months, our near-term targets and through several important technical levels, all in the space of two trading sessions.

One month’s data may not a trend make. Even so, this morning’s batch was pretty solid. U.S. retail sales rose 1.1 percent in February, the biggest gain in five months, and January’s numbers were revised up. Some of the rise reflected higher gas prices, but much of it appeared to be real.

The National Federation of Independent Businesses’ small business optimism index also rose, for a sixth straight month.

Eric Green at TD Securities says that as far as potential revisions to GDP forecasts, he’s keeping his powder dry for now:

No wonder most Americans feel like the recession never ended. A new paper from Emmanuel Saez, a Berkeley professor and expert on inequality, shows the overwhelming majority of income gains – 93 percent – accrued in 2010, the first full year of the U.S. recovery, went to the top 1 percent richest Americans. (Thanks to our friends at Counterparties for bringing the paper to our attention.)

The research suggests economic growth, even if it gathers speed, will not be nearly sufficient to close the income gap that has been the target of national Occupy protests. Instead, only drastic tax reforms of the sort seen during the 1930s might do the trick.

In 2010, average real income per family grew by 2.3% but the gains were very uneven. Top 1% incomes grew by 11.6% while bottom 99% incomes grew only by 0.2%. Hence, the top 1% captured 93% of the income gains in the first year of recovery. Such an uneven recovery can help explain the recent public demonstrations against inequality. It is likely that this uneven recovery has continued in 2011 as the stock market has continued to recover.

Maybe it never went away at all. But if the war was dormant, Brazilian President Dilma Rousseff certainly launched what appeared to be an opening salvo for a new round of battles – rhetorical ones for now.

Rousseff reached for some cataclysmic language to describe the recent appreciation of the real, which Brazil worries will crimp exports and hurt the domestic economy. The culprit, according to Rousseff, is an irresponsible “monetary tsunami” resulting from the ultra-loose monetary policies of rich nations like the United States.

Alonso Soto and Tiago Pariz offer some background in this Reuters article out of Brasilia: