Eye on the Economy: New Housing Stimulus Package Is Sorely Needed
Three months ago, record-high oil prices posed a major threat to the U.S. economy. But oil prices have fallen by roughly 50% from those highs, returning to levels not seen in more than a year.
Gas prices at the pump have been retreating as well despite some recent damage to refineries during the hurricane season.
Although energy costs still are high by historical standards, the recent declines ease one source of downward pressure on U.S. economic activity.
Oil prices should recede further as global economic activity and the demand for energy continue to weaken during the balance of this year and the early part of 2009, providing a modest offset to the massive negatives ganging up on the U.S. and global economies.
The U.S. Economy Apparently Is in Recession and the Global Economy Is on the Edge
Economic fundamentals deteriorated badly during the third quarter and downward momentum has extended into the final quarter of the year.
Housing market activity has continued downward and housing-related weakness is showing up in other key sectors, in particular, consumer spending, which is now contracting sharply.
It now appears that gross domestic product (GDP) growth slipped into the red zone during the third quarter, and we’re projecting further declines for the following two quarters before positive growth returns next year.
Recent and projected economic performance, if realized, almost certainly will qualify as an “official” recession in the U.S. economy. That judgment will be made by the Business Cycle Dating Committee at the National Bureau of Economic Research.
Indeed, the setback now figures to be substantial, compared with the mild recession scenario in our forecast not long ago. Furthermore, the global economy may very well throw off convincing recessionary signals before long as activity weakens in other major industrialized economies as well as in key emerging markets.
The Labor Market Is Deteriorating Badly
The labor market now is providing convincing evidence of recession from the supply side of the economy, led by a long and deep downswing in residential construction employment.
The contraction in total payroll employment began in January and accelerated markedly in September, particularly in the private sector.
The unemployment rate was 6.1% in September, the high point for this cycle so far, and broader measures of labor underutilization — including discouraged workers and those working part-time for economic reasons — have risen even more seriously.
Further deterioration of labor market conditions is inevitable in the near term as the economy sinks deeper into recession.
NAHB’s forecast now shows net job losses through mid-2009 and an unemployment rate that reaches 7.4% by late next year.
Inflation Pressures Are Waning Rapidly
Both headline and core inflation measures (excluding food and direct energy prices) have been on the high side recently, largely reflecting record-high oil and other commodity prices and some feed-through into the core measures.
But recent declines in commodity prices ― particularly oil ― along with inevitable downward pressure on unit labor costs in a deteriorating job market, will make inflation a back-burner issue in the near future, relieving the Fed and markets of that source of concern.
The core Producer Price Index for finished goods continued to gravitate upward in September, rising to a 4.0% year-over-year pace, but price pressures at earlier stages of production (intermediate and crude) began to reverse over the past two months. That definitely has positive implications for finished goods pricing down the line.
The Consumer Price Index (CPI) was up by 4.9% in September and the core rate posted a 2.5% gain (year-over-year basis).
But on a seasonally adjusted month-to-month basis, the overall CPI edged down for the second consecutive month and the core CPI slowed to a 1.7% annual rate in September. Core inflation figures are expected to slow further during the balance of this year and in 2009.
The Financial Market Crisis Has Intensified
Financial markets have been in a state of panic since late-September as lack of trust among parties and counterparties has worsened and as evidence of economic weakness has spread around the globe.
The stock market has lost a tremendous amount of ground, both nationally and globally, wiping out a decade of equity accumulation in the process. Conditions in credit markets have been even worse as funding volume has contracted sharply and credit-quality spreads have widened to record proportions in all components of private credit markets.
Short-term credit markets have been hit the hardest, including interbank markets here and abroad as well as commercial paper markets that businesses rely on for working capital.
The LIBOR market has been in shambles, reflecting the refusal of banks to lend to each other, and spreads between dollar LIBOR rates and things like expected fed funds rates and short-term Treasury rates have been astronomical.
These types of problems have persisted despite massive and coordinated actions by policymakers in the U.S. and other major developed countries.
Extraordinary Policy Intervention Has Yet to Ease the Crisis
The Emergency Economic Stabilization Act was signed into law on Oct. 3 following an incredible journey through Congress. This act contained the massive and controversial $700 billion Troubled Asset Relief Program (TARP) that had been designed by Treasury and the Fed and marketed heavily by the White House.
TARP provides broad authority for Treasury to use the funds to stabilize the financial system through equity investments, asset purchases and credit enhancements.
On Oct. 10, the members of the G7 announced a coordinated action plan to address the burgeoning financial market crisis. In Europe, several governments moved to guarantee various forms of bank liabilities (deposits and/or debt) and to make outright injections of capital into their banking systems. The U.S. government subsequently announced a two-part plan along similar lines.
News of policy coordination by the G7 sparked a massive one-day rally in U.S. and foreign stock markets on Oct. 13. However, market enthusiasm waned in subsequent days and major market indexes have once again approached their recent dismal lows.
It obviously remains to be seen how successful the extraordinary global policy intervention will be in quelling the financial market crisis. Federal Reserve Chairman Ben Bernanke has stated repeatedly and emphatically that the Treasury and the Fed will not “stand down” until the financial crisis in brought under control.
But financial markets obviously are wondering whether or not our policymakers really have the tools to do the job.
The Fed Cuts Rates and There’s More to Come
The impressive series of liquidity-enhancing innovations rolled out by the Fed this year, including the new program to buy commercial paper, are designed to improve the functioning of financial markets.
Believe it or not, the huge amounts of funds injected into the system by the Fed have not actually represented net additions to overall liquidity or to bank reserves, since funds have been withdrawn from the system by the Fed through other means — primarily via sales of Treasury securities in the open market.
But the Fed has also made monetary policy more stimulative by reducing the discount rate and the federal funds rate target by large amounts. The most recent move involved half-point cuts on Oct. 8 — between scheduled Federal Open Market Committee (FOMC) meetings ― in an unprecedented joint action with five other major central banks.
The federal funds rate target now is 1.5%, placing the bank prime rate at 4.5%, and we’re expecting another half-point cut at the next FOMC meeting on Oct. 29 — taking the real (inflation-adjusted) funds rate deeper into the negative zone.
We now expect the Fed to maintain this highly stimulative monetary policy stance until late next year.
The Housing Contraction Still Is Underway
The slumping economy and the turmoil in financial markets have laid heavy hits on consumer confidence and consumer spending, and home sales definitely have been pushed down in the process — with the possible exception of foreclosure-related sales of existing homes at fire-sale prices.
Those sales actually have contributed to downbeat price expectations and detracted seriously from sales of new homes.
NAHB’s proprietary survey of 30 large single-family home builders (accounting for roughly one-fourth of all for-sale housing in the U.S.) shows ongoing erosion of both gross and net sales of new homes through September — both before and after seasonal adjustment.
Cancellation volume naturally has been falling as the backlog of signed sales contracts has trended sharply downward, but cancellation rates — measured relative to current sales volume or to the contract backlog — are not far off the record highs posted about a year ago.
NAHB’s single-family Housing Market Index (HMI) fell back to a new record low of 14 in October, following a slight increase in September. All three components of the HMI —— current sales, sales expectations and buyer traffic — registered record lows in October and all major regions were at or close to their record lows.
We’re expecting further declines in home sales, house prices and housing production as the year progresses and it’s extremely difficult to pinpoint troughs for any of these measures.
Furthermore, downside risks to our short-term forecasts are proliferating, accentuating the need for additional policies to help stem the highly destructive downward cycle in the housing sector.
Another Housing Stimulus Package Is Sorely Needed
Our central bank recently has been pulling out the stops to help support the economy and avoid financial market Armageddon ― and there’s undoubtedly more to come.
However, the Fed is finding that the stampede to credit quality, triggered by the meltdown of the mortgage market and persistent declines in house prices, is very hard to rein in.
Indeed, Fed easing of monetary policy, along with the series of innovative liquidity-enhancing mechanisms, has had only limited success in the interbank loan market and even less success in freeing up credit for households, businesses and municipal governments.
The Housing and Economic Recovery Act of 2008 that was signed into law at the end of July had a number of provisions that held out promise for the deteriorating housing market.
But the most promising provision, the temporary $7,500 refundable but repayable tax credit for first-time home buyers, apparently is providing only minimal support to housing demand. And the new Hope for Homeowners provision may turn out to have relatively little effect on foreclosures, considering the immense size of the problem.
The massive $700 billion Troubled Asset Relief Program, the centerpiece of the Emergency Economic Stabilization Act, is being used by the Treasury to strengthen bank capital positions as well as to get deteriorating mortgage assets off the balance sheets of financial institutions.
While such results certainly are essential to ultimate recovery of financial market conditions, it remains to be seen how well the programs will work in practice. Indeed, the recent dismal performance of financial markets shows a good bit of skepticism among market participants on that front.
The strenuous efforts by Treasury and the Fed are necessary, but they are not sufficient to rebalance demand and supply in housing markets and halt the destructive deterioration of house values.
It’s now clear that the Administration and the Congress need to enact additional measures to stem foreclosures and bolster home buying — as soon as possible. Indeed, Bernanke recently allowed that he is sympathetic to policies that support housing directly, in view of the vicious feedback loop involving falling house prices and rising foreclosures.
Attend or View the NAHB Construction Forecast Conference
Don't miss NAHB's 2008 Fall Construction Forecast Conference and Webcast for the latest economic news about the housing industry.
Join NAHB on Oct. 22 in Washington, D.C., where the country’s leading economists and finance experts will provide insight into the uncertainties of the housing market.
Onsite registration is available the day of the conference.
To register for the Webcast, and to see the full conference agenda, visit www.nahb.org/cfc.
Want to Know the Housing Forecast for the Top 100 Metros?
Find out in HousingEconomic.com’s 2008 to 2009 Metro Forecast (free preview).
Get the metro forecast with in-depth analysis, overviews and downloadable Excel tables.
To learn more, visit www.HousingEconomics.com.
Free NAHB Kit Gives Builders Back-to-Basics Tips to Navigate the Slowdown
What was once expected to be a relatively mild housing slump following three years of record new home construction and sales has given way to a significant downturn.
To help members navigate the uncharted waters of this slowdown, NAHB has compiled a comprehensive “Back to Basics” online toolkit — the best of the basics, the tried and true and the truly new. To access the toolkit, click here.
To access the “Back to Basics” toolkit, you must be an NAHB member and have a login to www.nahb.org. To create a login, go to www.nahb.org/login or click on the log-in button on the main menu bar.
For assistance, call the NAHB Member Service Center at 800-368-5242.