There are some encouraging signals out there, including recent declines in energy costs, some strengthening of stock prices and some recovery in consumer sentiment (University of Michigan series) in early April.
Our assumptions on the war have been on target, but geopolitical complications remain ...
The heavy damage to the economy in February and March was caused largely by deep concerns among consumers and businesses about the war with Iraq and related matters that fall into the category of “geopolitical uncertainties.” NAHB’s forecast had assumed that war would break out in March and that coalition forces would achieve a decisive victory in about a month.
These assumptions have essentially been borne out, although “relief rallies” in financial markets have been limited by uncertainties over the whereabouts of Saddam Hussein and his immediate circle, as well as by the failure to find convincing evidence of those “weapons of mass destruction” on Iraqi soil. Furthermore, other trouble spots have popped up in the Middle East, and the task of establishing a stable and friendly Iraq after the hostilities obviously is daunting.
These issues are preventing a quick and strong snap-back of confidence and spending behavior, particularly among American businesses. But it’s still likely that things will improve on this front by mid-year — barring another major shock from the Middle East or elsewhere.
The SARS outbreak, emanating from Hong Kong and southern China, could have frightening impacts on the global economy, but it’s much too early to assess the implications for the U.S.
Fiscal stimulus is on the way, but the Bush tax plan has met stiff opposition ...
We’ve been assuming a large amount of additional fiscal stimulus to the U.S. economy — composed of a surge of federal spending on defense and homeland security as well as a large package of tax cuts patterned after the President's “Jobs and Growth” package proposed in January — in the second half of this year and 2004. The federal spending component is on track, including an $80 billion supplemental appropriation that recently was approved by Congress. The Bush tax-cut plan, on the other hand, has met stiff opposition on Capitol Hill, leaving the size and composition of any tax bill, and the schedule for enactment, up in the air.
In a series of mind-boggling machinations, the President’s original $724 billion proposal has been bounded by a $550 billion limit in the House of Representatives (after the House had approved the entire package) and a $350 billion limit in the Senate — and neither side of the aisle has yet specified details. Even the White House has deftly changed gears, now focusing on $550 billion rather than the original $724 billion package and backing off on the size of the centerpiece of the plan — the elimination of double taxation of corporate income.
The “best bet” now seems to be a bill out of House-Senate conference that’s close to the Senate limit ($350 billion), and with passage around mid-year. This outcome would be close to the fiscal assumption already built into NAHB’s forecast, and such a bill would provide solid support to the economy in the second half — particularly if the tax cuts are made retroactive to the beginning of the year.
Stable monetary policy is still the best bet, but the Fed is prepared to move ...
The Federal Reserve opened the door to a near-term rate cut when the central bank essentially pleaded ignorance about the condition of the economy, and the balance of risks, at the conclusion of the FOMC meeting on March 18. The Fed has not moved since then, of course, and it’s highly unlikely that monetary policy will be changed before the next FOMC meeting in May.
There’s some pressure on the Fed to cut rates at the May 6 meeting, if only to provide some “insurance” in an economic environment that certainly qualifies as shaky, and the Fed could go ahead with a small cut. But Chairman Greenspan has argued that, once the “geopolitical uncertainties” dissipate, underlying growth momentum should move the economy into a stronger range and obviate the need for more monetary stimulus. NAHB has been assuming that the Fed will hold steady until October, before starting to raise the federal funds rate, and we’re sticking with that assumption for now.
Incidentally, President Bush has just announced his intention to reappoint Alan Greenspan to another four-year term as Fed Chairman when Greenspan’s current term expires in June 2004. This announcement gave an immediate boost to the stock market and certainly does not signal a “deal” between Bush and Greenspan, contrary to speculation by some pundits in the media.
The housing sector is poised for an excellent 2003 after an exciting first quarter ...
The first quarter was rather rocky for the housing market, reflecting major swings in weather conditions as well as inevitable impacts of the Iraq situation on the attitudes of both households and builders. But, thanks largely to yet another downshift in mortgage interest rates, the housing sector came through it all in good shape and made yet another solid contribution to GDP growth.
Housing starts for the first quarter actually edged up from the very strong close to 2002, totaling 1.75 million units (seasonally adjusted annual rate). This quarterly performance, topped off by a robust 1.78 million in March, prompted a slight upward revision to NAHB’s housing forecasts for 2003. We’ve now got 2003 level with an excellent 2002, despite some anticipated upward pressure on the interest rate structure later this year.
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.
Want more economic information? Find it in our publications ...
Find more in-depth information in our three economics publications, Home Builders Forecast, Housing Market Statistics and Housing Economics. All are availaible by subscription.
- Home Builders Forecast includes analysis of single-family and multifamily residential activities, residential remodeling and the full range of nonresidential construction as well as the macroeconomic factors such as GDP, employment and interest rates that drive construction. If your business depends on reliable estimates of housing starts, construction spending and remodeling activity, Home Builders Forecast is designed to meet your needs.
- Housing Market Statistics contains an overview of important developments and trends that serves as an executive summary of the current industry situation. It also contains annotated charts depicting movements in key indicators and tables providing monthly, quarterly and annual data for more than 250 variables.
- Housing Economics is our monthly rigorous overview of the economy, data for more than 100 local markets and in-depth analyses of the niches and nuances of home building markets. Available online or in print, it is written in terms that builders, manufacturers and housing finance professionals can understand and apply to their own businesses.
To learn more or to order any of these three NAHB economic publications, visit the Economics Publications Information section of the NAHB Web site or call 800-223-2665.
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