Growth will then top 4% in the final quarter of 2003, Seiders said, and hold around that pace throughout 2004.
“Prepare for a liftoff,” advised Joel Prakken, chairman of Macroeconomic Advisers LLC. The economy is seeing the fastest growth rates “right now” because “the most energy is required in the boost phase,” he said. But even as growth trails off from its initial spurt, the economy should keep on growing in the 4.25%-4.5% all of next year.
Both fiscal and monetary policies are in “perfect” alignment, Prakken said, for a “crescendo” of stimulus, which is an extremely rare occurrence since the two are usually in conflict.
During next year, “as stimulus fades, the rest of the economy will step up and take over,” he said, noting that “it’s the private sector that makes the economy go.”
Factors that will keep the economy perking, according to Prakken, include: stock market gains, a global economic recovery, the increasing competitiveness of U.S. exports from a weakening dollar, production increases following the leanest business inventories ever, a gradual correction of shortages of computer equipment and software and the continuation of “gaudy” acceleration in productivity growth.
“Business spending is picking up gradually, and we are finally getting some support on capital spending, which has been the missing piece of the puzzle,” noted Mike Moran, chief economist for Daiwa Securities America Inc.
Long-term mortgage interest rates, which are currently just above 6%, “are not all that high” Moran said, despite upward momentum since mid-summer. And even if they rose to 7% next year, which would be at the high end of the forecasts offered at the conference, “they would still be at the low end of the range prevailing over the past several years.”
The consensus of panelists was that the Federal Reserve would not move to increase interest rates until it becomes more apparent that the economy is in no danger of entering a deflationary phase and that there is less slack in the economy. That probably won’t happen until late next year or even early in 2005.
Moran said that unemployment is headed down from its current level, about 6.1%, but the descent will be slow because there will be several more quarters of strong productivity growth and a lot of people who dropped out of the job market will start coming back as the economy improves.
Prakken predicted that the unemployment rate would fall to 5.5% by the end of 2004.
Although a relatively bleak employment picture in recent times would suggest that there shouldn’t have been as much demand for housing as there actually has been, Moran said that “there is a wider market than in the past” because the housing market “has been opened up to segments that have never participated in the market before.”
“Housing prices have held up well,” he added, “and we haven’t had the meltdown in prices that many people were looking for.” And as a result, “more people will be leaning to real estate investment.”
Mitigating against the modest climb in mortgage rates likely next year, Moran said, is the fact that the housing industry has become less interest-rate sensitive.
Home buyers have the option of financing their homes with lower-priced adjustable rate mortgages, he said. Also, they are less averse to buying a home with a higher mortgage rate because they know that when interest rates decline they can go in and refinance inexpensively and easily.
NAHB is forecasting that housing starts will decline from 1.786 million this year to 1.7 million in 2004.
The semi-annual Construction Forecast Conference is sponsored by the National Council of the Housing Industry — the Supplier 100 of NAHB.
Photos by Morris Semiatin