My best read of the situation is that the economy still hasn’t quite “kicked” that is entered into a position where – as long as monetary policy co-operates – the general trend will be to close in on full employment.

If the auto-sales continue to grow from their Fed pace of 15.1M SAAR then we are a good bit there. However, housing is not quite over the bridge.

I should be clear that I don’t mean the single family owner occupied housing market is repaired, foreclosures have ended and families are no longer underwater. I don’t think this is likely to happen for some time. However, I also don’t think its necessary for a full recovery.

Instead, what I am looking for are rental vaccancies so tight that builders will begin to step up the pace of multi-family starts even above what they have now. I am looking for rents to start increasing at somewhere in the neighborhood of a 4% annual rate. Given current long term interest rates this will make new apartment construction a no-brainer even if you don’t believe that a full recovery is coming.

However, a booming construction industry will provide jobs and income for unemployed workers. This in turn will spur more household formation which in turn will spur even more multi-family construction.

Its entirely possible – though it probably playout this way – to have a roaring construction recovery where single family built-for-sale houses play no role. That means we just don’t need the single family owner occupied housing market to be fully repaired.

Nor do we need consumers to be deleveraged. There is a significant dearth of capital structures in the United States and full employment could be supported on the back of bringing the capital structure into line with its long run growth trajectory.

This means more jobs and income without more consumer spending. This is possible. Though, I will say, not likely. As the economy recovers consumers will likely try to spend more even before the capital stock is fully re-established.

This is doubly true if we – as we should hope to – see a smooth and steady decline in the dollar. However, I’ll save most of that for another post.

As for Okun’s law. I think a GDP-less recovery is possible because we will back out some of the gains that we got from import switching. The short story – told to me originally by Michael Mandel – is that our productivity statistics have been juiced by the fact that more and more of our production is being outsourced.

However, the BLS is fully counting the decreased cost of outsourcing as a price change. This makes real imports look smaller than they otherwise would which makes real value added by the US economy look larger than it otherwise would.

Michael wants to say this is false productivity. To my eyes it just looks like the productivity increase from gains to trade. However, this is a distinction without a difference. We agree exactly on how the process works and its impact on aggregate statistics and the US employment.

The process makes measured productivity gains appear large and it makes for a weak domestic manufacturing sector.

Yet, the process shows signs of reversing itself. Rising labor costs in China make it less competitive. The receding of the financial crisis reduces the demand for the dollar denominated assets and hence allows the dollar to fall in value.

These forces work to encourage the re-shoring of production. That process will be a boon to manufacturing employment in the United States but it should also cause the productivity gains to reverse. This could produce what looks like a GDP-less recovery.

Jobs will be growing but GDP growth will be slow and productivity steadily declining. It sounds like an unfortunate combination, but remember its simply the reverse of the last 10 years. Few Americans felt those went well. Many more should fell that the next few years are going well.