Consumers Appear to Be Following Businesses Into the Bunkers
The American consumer has been remarkably resilient since the onset of recession two years ago, in sharp contrast to the business sector. But now the consumer appears to be wearing down as well, as worries about jobs and the costs of gasoline and heating oil rise.
Consumer confidence/sentiment sank to nine-year lows in February, further declines are likely for March and there’s now some evidence that consumer spending is weakening. Auto sales deteriorated in February and weekly reports from chain stores suggest that retail sales have given ground.
The Federal Reserve’s “beige book” for February, based on reports from regional Federal Reserve Banks, said that “geopolitical and economic uncertainties” were constraining consumer as well as business spending and “tempering near-term expectations.” That’s the most downbeat assessment of the consumer sector we’ve seen from the Fed for some time!
Financial Markets Crave Quick Resolution of the Issues
Financial markets hate uncertainty, and the investment community (domestic and international) obviously craves quick and decisive resolution of the Iraq situation. Indeed, investor confidence (reflected in the stock market) seems to deteriorate when the diplomatic turmoil appears to lack direction and when supposed deadlines turn out not to be deadlines at all. Confusion on these points has helped drive the stock market to five-month lows, and we’re now testing the depressed levels of last October.
President Bush has said that, with respect to national and world security, the costs of not dealing decisively with a defiant Saddam Hussein far outweigh the costs of dealing with Iraq quickly and decisively. Much the same case apparently can be made for the U.S. and world economies and the financial markets! If Saddam keeps getting the delays he is working for, without meaningful disarmament, the weight of uncertainty will continue to build on the economy, the stock market and quality spreads in the bond markets.
Home Buying Should Stay Afloat Amidst the Tug-of-War Between Uncertainties and Falling Mortgage Rates
The growing geopolitical and economic uncertainties have taken a heavy toll on consumer confidence and the stock market, and consumer spending apparently has been affected in the process. But a flood of capital out of stocks and into bonds has driven long-term interest rates to truly historic lows, and the Fed may soon move short-term rates down in tandem. The rate declines (and the stock market contraction) have bolstered incentives to invest in housing, and house prices continue to move up at a solid pace in most parts of the country. Thus, the two main supports to the housing market — falling mortgage rates and rising house values — are still out there.
The Fed’s beige book for February reported ongoing strength in sales of new and existing homes, with some softness at the high end, and mortgage rates have fallen further since then (the fixed-rate loan is now about 5.6% and 1-year ARMs are around 3.7%). Home purchases are highly discretionary, of course, and prospective buyers can put things on hold if they are worried enough, whatever the level of mortgage rates. But in the absence of a real calamity on the war and terrorism fronts, any pause should prove to be temporary and quickly regained. NAHB’s forecast continues to project near-record home sales for 2003 as a whole, with housing starts off only slightly from an excellent 2002.
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 rebroadcast of his March 12 issue. To subcribe to Eye on the Economy, click here.
Don't Miss NAHB's Spring Construction Forecast Conference
The housing sector has been a pillar of strength, while the rest of the economy continues to sputter. And the geopolitical storm clouds have darkened while economic policy has proliferated. What does all this mean for our economy? Our industry?
Find out at the NAHB Spring Construction Forecast Conference at the National Housing Center in Washington, DC. on Thursday, April 24, 2003. Among the topics discussed will be:
- What impact the Administration’s economic stimulus plan will have on housing
- How the Federal Reserve will react to fiscal stimulus
- How your local market might respond
- Whether a strong multifamily market will yield to oversupply
- How you can best meet and overcome the current challenges within the housing sector
To learn more, or to register for the NAHB Spring Construction Forecast Conference, click here or call 800-368-5242 x8338.
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