Eye on the Economy
David F. Seiders, NAHB Chief Economist
Economic growth accelerates in the third quarter amidst another surge in productivity growth …
Growth of real Gross Domestic Product (GDP) accelerated to a 7.2% pace (annual rate) in the third quarter, the fastest expansion in nearly 20 years. Incredibly, this rapid growth in output reflected acceleration of productivity growth (output per hour) to about 8%, as payroll employment eroded further. Thus, the specter of a job-losing economic recovery that began around the end of 2001 continues to haunt the economic and political scene.
How long can this go on? It’s perfectly clear that the tremendous monetary stimulus delivered by the Federal Reserve, along with the tremendous fiscal stimulus delivered by the recently enacted tax-cut legislation and the acceleration of federal spending on defense and security, have successfully propelled spending by households and businesses as well as by the government. But, so far, the pickup in business spending has been concentrated in investment in capital equipment and software (productivity enhancing outlays) rather than in hiring.
Happily, there have been recent signs of stabilization, and tentative signs of revival, in the U.S. labor markets. The employment report for October showed an encouraging increase in payroll employment, and weekly data on claims for unemployment compensation have been looking somewhat better for some time. NAHB’s forecasts show healthy and sustained job growth starting late this year, even as GDP growth recedes to a more-sustainable pace. It must be admitted, of course, that the dimensions of the productivity phenomenon are extremely hard to peg.
Consumer confidence moves up in October as the job market shows signs of life …
Consumer confidence (Conference Board series) picked up in October, and the University of Michigan’s measure of consumer sentiment showed a similar pattern. Even so, these indicators hardly reflected the exuberance of consumer spending in the third-quarter GDP accounts. Instead, the improvements in confidence/sentiment reflected the beginnings of improvement in the job market.
Federal Reserve Chairman Alan Greenspan frequently stresses that what consumers do is much more important than what they say. Consumers are now spending aggressively, and history suggests that the confidence/sentiment measures will rise much more decisively as the economic expansion pulls the job market forward.
The Fed holds short-term rates steady and reassures the bond markets …
The Federal Reserve held its target for the federal funds rate steady (at 1%) at the Oct. 28 meeting of the Federal Open Market Committee (FOMC), a decision that was expected by virtually all observers of the monetary policy scene. Furthermore, the decision was unanimous, showing a refreshing lack of defectors on Greenspan’s FOMC despite the presence of a few traditional anti-inflation "hawks" on the committee.
Prior to the October FOMC meeting, some concerns had been building in securities markets about the durability of the Fed’s previously announced commitment to an extended period of monetary stability, in view of the obvious third-quarter surge in economic growth and the glimmers of improvement in the job market since the previous meeting. But the Fed put out a market-friendly public statement on Oct. 28 that differed from the previous statement in only one respect — an assessment that the job market is "stabilizing" rather than "weakening." Most important, the Fed maintained a risk statement slanted toward weakness (because of ongoing concern about potential price deflation) and stood by its belief that "policy accommodation can be maintained for a considerable period."
The Fed’s words and actions on Oct. 28 provoked an immediate "relief rally" in the bond and mortgage securities markets and reinforced expectations for an extended period of monetary stability. NAHB’s forecasts still show a 1% federal funds rate until late next year, with only a modest rise in long-term rates before then.
Home sales surge to new records in the third quarter as 2003 heads toward uncharted territory …
Sales of both new and existing homes were robust in September, hitting a combined annual rate of 7.835 million units — easily a record pace. Indeed, the third quarter as a whole also was an all-time high for both segments of the market, easily surpassing the previous record that was set in the second quarter of this year. It’s no wonder that the housing production component of GDP, which includes commissions on home sales, surged to a 20% growth rate in the third quarter.
The third-quarter surge in home sales may have included a temporary boost, as some "fence sitters" may have jumped into the market after mortgage interest rates bounced off their cyclical lows in June. But surveys of single-family builders and mortgage lenders (conducted by NAHB and the Mortgage Bankers Association, respectively) show ongoing strength in home buyer demand through October. While some near-term fade in sales seems likely from the astounding third-quarter pace, there’s little doubt that 2003 will turn out to be a record year for home sales in the U.S.
The homeownership rate hits a new record while rental vacancy rates continue to climb …
The U.S. homeownership rate hit a record 68.4% in the third quarter, as the number of owner-occupied housing units surged to 72.2 million. As usual, the homeownership rate was highest for non-Hispanic white households (75.7%) and lowest for Hispanic/Latino households (46.1%). Various racial and ethnic homeownership "gaps" actually have widened as the rate for whites has increased aggressively.
Surging home sales and rising homeownership continue to weaken conditions in the rental housing market. The overall rental vacancy rate climbed to a record 9.9% in the third quarter, and the rate for buildings with five or more units rose to a near-record 11.5%. Indeed, the drain of households from renting to ownership has been reducing the absolute number of renters despite healthy levels of household formation. No wonder landlords across the country are offering rent concessions and other incentives to retain and attract renters.
NAHB Chief Economist David Seiders analyzes the economy from the point of view of the housing market every other week in the free e-newsletter, “Eye on the Economy.” The preceding is a reissue of his Nov. 5 edition. To subcribe to “Eye on the Economy,” click here.
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