Economic activity shifting from construction to manufacturing

Housing and manufacturing are fighting over the fate of the economic recovery:

There's a sharp divergence emerging in the U.S. economic recovery, with housing stumbling and the industrial sector booming.

Ground-breaking for new homes and applications for building permits both plunged last month, as a popular set of tax breaks designed to stimulate home buying expired. The pullback is a worrisome sign that the recovery could face setbacks as the props for demand implemented during the depths of the recession are removed.

Meanwhile, the U.S. industrial sector is providing an unexpected degree of support to growth. Industrial production—the output of factories, utilities and mines—rose 1.2% in May, compared with the month before, the Federal Reserve said on Wednesday, as global demand for a wide range of U.S. goods continued to grow.

"What's taking place is a change in the sources of U.S. growth," said Joe Carson, an economist at AllianceBernstein. Demand for housing used to lead the economy into recovery, he said, but now global demand, particularly from emerging economies like India, Brazil and China, is helping bolster U.S. growth.

Free Marketers argue that in order for the economy to recover from a recession, it is necessary for the economy to shift away from the sectors of previous over-investment toward other economic sectors. This appears to be happening. (Compare this with politicians' inclination to pour money into the declining sector.)