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Eye on the Economy: The Economy Is Improving, Or Is It?

The Commerce Department’s Bureau of Economic Analysis reported that real (inflation-adjusted) gross domestic product (GDP) fell 0.7% at a seasonally adjusted annual rate during the second quarter, an improvement from two earlier estimates indicating a 1.0% decline.

Meanwhile, various other economic data suggest that real GDP will increase in the third and fourth quarters. Industrial production, for example, advanced during July and August, pushing up capacity utilization.

Unadjusted for inflation, retail and food services sales fell 1.5% in September after jumping 2.2% in August from the month before, on a seasonally adjusted basis. This was largely driven by the “cash for clunkers” program, which pushed the measure up in August, but held it down in September.

Excluding motor vehicle and parts sales, this measure was up 1.0% in August and 0.5% in September and its has increased in four of the last five months — suggesting that consumers may be feeling a little better about making purchases.

To keep this in perspective, however, total retail and food services sales were down 5.4% from a year earlier, but down 4.9% when motor vehicle and parts sale are excluded.

More than 80% of the economists responding to the National Association for Business Economics forecast survey believe that the recession is now over, although they generally expect the recovery to be slower than usual.

Employment Takes Another Step Down

The September employment report was a bit of a surprise. Non-farm payroll employment fell 263,000 at a seasonally adjusted annual rate from 201,000 in August. Nonetheless, September’s drop was still an improvement over the June-through-August average loss of 323,000.

At the same time, residential construction employment fell 13,300 in September, an improvement over August’s drop of 19,600 and the 19,800 jobs lost in July.

Since September 2008, the nation has lost a total of 5.8 million jobs, including 443,000 residential construction jobs. The national unemployment rate for September was 9.8% — up from 9.7% in August. The construction unemployment rate increased in September, jumping to 17.1% from 16.5% the month before.

Construction has registered the highest unemployment rate among the major sectors of the economy, with durable goods manufacturing registering the next highest unemployment rate at 13.1%. We expect job losses to slow through the remainder of the year and eventually turn into job gains beginning early next year.

While it is normal for employment to lag the rest of the economy, job growth could prove to be sluggish in this recovery, putting a drag on the general economy and the housing sector, in particular.

Housing Continues to Struggle

Housing continues to be buffeted by multiple forces. A weak economy, dismal job market, foreclosures, fears of further declines in home values and tight credit conditions are among the factors weighing the housing market down.

In August, existing home sales fell for the first time since March — dropping from 5.2 million in July to 5.1 million, at a seasonally adjusted annual rate. However, the August sales rate was an improvement over the August 2008 sales rate of 4.9 million.

Even so, the recent slowdown in sales is somewhat troubling in the face of the looming Nov. 30 expiration date for the first-time home buyer tax credit. The tax credit should have boosted sales for August as households rushed to meet the deadline, and it may still give a boost to September existing home sales.

New home sales posted their fifth monthly increase in August, though just barely, rising to 429,000 for the month, at a seasonally adjusted annual rate up from 426,000 in July. That, however, was below the August 2008 sales rate of 444,000.

At this point, requirements for making a simple home purchase and lining up a mortgage precludes anyone who is not already in the sales process from utilizing the first-time home buyer tax credit.

It does appear that new home sales have benefited indirectly from the first-time home buyer tax credit by enabling owners of existing homes to sell their homes to first-time buyers eligible for the tax credit. Once their homes were sold, this allowed them to buy newly built houses.

Consumers Send Out Mixed Signals

While the University of Michigan’s consumer sentiment index rose to 73.5 in September from 65.7 in August, the Conference Board’s Consumer Confidence Index slipped from 54.5 in August to 53.1 in September.

On housing in particular, consumers’ views of the marketplace held steady in the Michigan survey, but there was slippage in the Conference Board’s assessment of consumer plans to buy a house over the next six months.

Improvement in retail and food sales during the past few months, excluding motor vehicle and parts sales, suggests some return of consumer confidence. However, the expiration of the first-time home buyer tax credit will act as a drag on consumers’ plans to buy a house.

Have Housing Prices Stabilized?

The seasonally adjusted S&P/Case-Shiller 20-city and 10-city Home Price Indexes were both up in June (0.9% and 0.8%, respectively) and July (1.3% and 1.2%). Still, both are down on a year-over-year basis — by 12.8% and 13.3%, respectively.

In July, 17 of the 20 cities in the 20-city index recorded house prices increase. That is up from eight cities in May and 16 cities in June. The 20-city index is now at the same level it was in mid-2003, before the dramatic run-up in house prices.

However, considering that the first-time home buyer tax credit has temporarily generated demand, it is a bit premature to declare that house prices have hit bottom. Increasing buyer demand, extending and expanding the home buyer credit and controlling future foreclosures will help determine if the process of stabilization in house prices will continue.

What Lies Ahead for the Economy and Housing?

The economy does seem to be in the early phase of a recovery as government money from the stimulus package is just beginning to flow into the economy, sparking some spending. Early indications are that overall output is on the rise, even as some parts of the economy continue to shed jobs. Unfortunately, job losses are still outstripping job gains, resulting in a net loss of jobs, and the outlook is for further job losses into early next year.

Housing demand, supported by the first-time home buyer tax credit, has shown some improvement since hitting bottom in January, which has stopped the slide in home prices in some markets. In most of the country, housing prices have returned to around their 2003, pre-bubble levels.

Six years down the line, this seems like a reasonable level for home prices in all but the most overbuilt markets, where excess inventory of houses is still a major impediment to bringing the market back into balance.

However, both the economic and housing recoveries are fragile and subject to setbacks. Consumer confidence remains shaky. Housing remains vulnerable as job losses mount. Pending foreclosures threaten to add more low-priced houses to the market.

Expiration of the first-time home buyer tax credit will remove a key support to housing demand. Unusually strict loan requirements continue to make it difficult for even households with good credit to obtain a mortgage to purchase a house.

This is further complicated by inappropriate appraisals, which have undermined a number of deals. And, finally, lack of production credit has limited the ability of many builders to respond to the limited demand that has blossomed in recent months.

All of these factors are acting as a drag on the demand for housing, which in turn is hindering the economic recovery.

NAHB Chief Economist David Crowe 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 Oct. 16 edition. To subscribe to “Eye on the Economy,” click here.

Plan to Attend Construction Forecast Conference and Webcast on Oct. 21

Plan to attend or watch the 2009 Fall NAHB Construction Forecast Conference & Webcast on Oct. 21 in Washington, D.C. to get the latest facts, insights and analysis of the housing industry.

Panels of nationally recognized experts at the day-long conference will discuss economic trends, government policies, developments in the housing industry and the results from NAHB's recent surveys.

For more information and to register, visit www.nahb.org/cfc.

  Want to Know the Housing Starts Through 2017?

Find out in HousingEconomics.com's Long-Term Forecast.

Subscribe and get downloadable Excel tables that feature the housing starts forecast, gross domestic product (GDP), demographics and more. 

To learn more, visit www.housingeconomics.com

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