Eye on the Economy
David F. Seiders, NAHB Chief Economist
The fall of Baghdad has little impact on financial markets …
Today, April 9, sure looked like a momentous day in world history as coalition forces took control of Baghdad and statues of Saddam Hussein were toppled throughout the city by triumphant forces and jubilant Iraqi citizens. But these stunning developments had little net effect on financial markets in the U.S. and abroad, despite widespread expectations of large 'relief rallies' in the event of dramatic military success and a decisive tear-down of the Hussein regime.
Perhaps the markets are just waiting for more evidence of a complete military victory in Iraq and some clarity regarding political transitions and humanitarian relief efforts, including the respective roles of the U.S., the U.K. and the U.N. Financial market pundits are openly wondering about the real economic benefits of the war, other than the easing of uncertainties that built up prior to the war and an inevitable spurt of defense spending to replace massive amounts of weaponry used in the war effort. Is the liberation of Iraq really enough to spark market rallies and rebounds in the U.S. and global economies? The test has now begun.
Rebounds in consumer and business confidence are essential ...
Most forecasters, including NAHB, are counting on rebounds in consumer and business confidence from recently depressed levels when success in the war is assured and the world oil market is declared safe. Oil prices surely have retreated from pre-war highs, and the risks to Middle East oil fields certainly have receded.
The stock market definitely is above pre-war lows, but forecasters expect a truly vigorous stock market rebound to precede, as well as to stimulate, improvements in both consumer and business confidence. For now, market analysts have simply shifted their focus back to those dratted corporate profits, and late-breaking reports from many major companies have been disappointing.
There's no question about the weakened condition of consumer and business confidence prior to the recent military successes. Measures of both consumer confidence (Conference Board) and consumer sentiment (University of Michigan) hit 10-year lows in March, although a late-March reading on sentiment perked up a bit. In the business sector, surveys of both corporate CEOs and owners of small businesses have shown eroding confidence and reluctance to invest or hire. Indeed, the buildup to war and concerns about terrorist backlash in the U.S. caused about two-fifths of surveyed companies to reduce hiring and spending plans for the year.
The economy is not reassuring reluctant consumers and businesses ...
It's fair to say that, following a promising January, the economy “hit a wall” in February and weakened further in March. The weather was a factor, but it's perfectly clear that those “geopolitical uncertainties,” including related damage to world oil markets, delivered a serious shock to the economy. Economic weakness tends to feed on itself, of course, so it's going to take major changes in psychology and significant support from economic policy to turn things around.
Looking back, it's fair to say that the buildup of tensions prior to the Bush ultimatum and the outbreak of war weighed even more heavily than we had expected on consumers, businesses and financial markets, and that weight apparently has not yet been lifted. Recent economic evidence includes: high and rising claims for unemployment insurance through February and March and substantial declines in payroll employment in both months; slippage of growth into the negative zone in March in both the manufacturing and services sectors (ISM surveys); lackluster sales of autos and light trucks in February and March; and loss of ground by the single-family housing market in February and early March.
These setbacks point toward weak GDP growth in the first and second quarters of this year, but there's also the potential for a substantial bounce-back effect in the wake of the war. We're still forecasting GDP growth around 2% for the first half of 2003, followed by growth in the 4% area for the next four quarters. That still seems like a reasonable estimate within the broad assumptions we've made about the war and economic policy.
On the policy front, we're still assuming timely enactment of at least half of the President's “Jobs and Growth” economic stimulus proposal and another $80 billion in federal spending for defense and homeland security. Furthermore, additional easing of monetary policy is not out of the question before mid-year.
Housing stumbles but should regain balance soon ...
The housing sector, a pillar of strength throughout the recession of 2001 and the uneven recovery of 2002, started 2003 on a very high note. However, most measures of single-family housing activity weakened markedly in February, despite extraordinarily low mortgage rates, and NAHB's Housing Market Index (based on surveys of single-family builders) registered a record decline in early March.
A good bit of the deterioration definitely was related to atmospheric conditions (i.e., abnormally bad weather). However, comments from builders and surveys of consumers suggest that home buying has not been immune to the sinking confidence and rising uncertainties characteristic of the February-March period. The good news is that weather effects are quickly reversed and that shortfalls in home buying related to temporary uncertainties will be regained quickly. While the government's estimates for home sales, starts and permits may not rebound in March, improvements most certainly will show up during the second quarter.
The two major supports to the single-family housing market during the past two years — historically low mortgage rates and solid rates of house price appreciation — are still in place and promise to be positives over the balance of this year and in 2004, even though their strength may wane as the economy and job market improve. On the house price front, the benchmark government series (OFHEO's repeat-sales index) showed ongoing strength in virtually all places through the final quarter of 2002, and prices of existing homes sold — on both the national and regional levels — threw off positive signals through February. In a remarkable change of focus, Chairman Greenspan suggested possible house price declines during a speech given early in March, but it's unlikely that the Fed's fundamental belief in the strength of house prices, and in the absence of price “bubbles,” has been altered.
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 April 9 e-newsletter. 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, D.C. on Thursday, April 24. 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.