Jobs outlook: Housing growth will trump sequester woes

The economy should continue to add jobs despite the sequester. The jobs report shows the housing recovery bolstering employment. Homeowner optimism is likely to improve, too.

Two-thirds back.

That's how far the United States has come in regaining the jobs it lost during the Great Recession. But it's been a long hard slog, taking nearly twice as long as the so-called "jobless recovery" of the early 2000s. Whether the current recovery speeds up from here depends on whether private sector growth proves stronger than public sector contraction.

So far, the signs are tilting positive.

"The private-sector news on the economy continues to be good, and we would be upgrading our forecast of 2013 growth slightly were it not for the federal spending sequester that began on March 1," wrote Nigel Gault, chief US economist for IHS Global Insight, in an analysis. "The sequester will not derail the recovery, but it does slow it down." 

Last month, the economy added 236,000 jobs, according to the Department of Labor. That brings the number of jobs created during the recovery to 5.7 million. The economy lost 8.7 million jobs during the recession. One of the biggest gainers was construction, which added 48,000 jobs, the biggest jump in nearly six years.

Confidence in the recovery is centered on the rebound in residential housing. Lights are burning longer in real estate offices. New housing construction sites are popping up across the country. That activity helps in two ways.

More home building translates directly into more jobs for construction workers and more sales of everything from lumber to electrical supplies and pickup trucks. Indirectly, rising housing prices mean that people feel richer because their homes are worth more. And if they think the rise is permanent, they begin to spend more.

"We've suddenly started to see some increase in real estate wealth," says Keith Hall, a senior research fellow at the Mercatus Center at George Mason University and a former commissioner of the Bureau of Labor Statistics. "This is a much more powerful stimulus than the government could ever provide directly."

But can housing's positive momentum escape the fears about government spending cuts – the so-called "sequester" – and, more generally, the uncertainty surrounding federal spending and tax policies going forward?

“The construction industry’s recovery remains fragile,” warned Stephen E. Sandherr, chief executive officer of the Associated General Contractors of America, in a statement Friday. “Putting billions of dollars worth of construction projects on hold because Washington officials can’t set a budget threatens to undermine the sector’s recovery just as it is starting to heat up.”

The consensus at the moment is that the sequester will slow but not swamp private-sector growth. It may hit hard states like Maryland and Virginia, which depend heavily on federal government contracts and are home to many federal workers. If Congress does nothing to alter the sequester, it could shave 0.5 to 0.6 percentage points off the growth in the nation's gross domestic product, with the peak of the drag hitting about mid-year, according to several estimates.

In a slow-growth economy, "that's a big drag," said Mark Zandi, chief economist of Moody’s Analytics. But the impact will be concentrated in the middle of the year, he added. "By the end of the year, the fiscal drag fades and the housing cycle is in full swing."

Consumers and small business owners do not appear as sanguine as economists. A Christian Science Monitor/TIPP poll, released earlier this week, found consumers' economic optimism fell to 42.2, down sharply from 47.3 a month earlier. (Any reading below 50 signals pessimism.) Small business owners' expectations for business last month stood at the fourth lowest reading ever by the National Federation of Independent Business (NFIB). And hiring by small business has lagged that of mid-sized and large companies, according to ADP's employment report released Wednesday.

Nevertheless, hiring is headed in the right direction. Both ADP and the NFIB have noted a pickup in hiring by small business.

“Job creation plans rose 1 point," William Dunkelberg, the NFIB's chief economist, said in a statement Friday. "This is historically weak but 3 points better than December, so at least the trend is positive."

The effects of the housing recovery will take time, Mr. Hall says. Historically, when a positive turn in housing comes, "it takes a year or a year and a half for employment in construction to pick up." Homeowners' optimism also builds gradually.

Thus, the positive impact of the housing recovery may need more time to take hold than the negative impact of the sequester. But it also looks more durable.