The Official Online Weekly Newspaper of NAHB
The unsettling economic news of recent weeks is unlikely to result in a double-dip recession, but it portends an anemic recovery taking some of the wind out of already feeble growth in housing activity and creating more uncertainty over all-important prospects for jobs and the restoration of consumer confidence, according to participants in an NAHB webinar on Aug. 16 (members-only link).
Political skirmishing over deficit reduction, which is likely to be intense this fall and winter and continue up through next year’s elections, will only add to concerns over the state of a fragile U.S. economy, they said.
A convergence of worrisome developments has set back the outlook for housing and the economy, noted NAHB Chief Economist David Crowe, starting with significantly weaker than expected growth in the gross domestic product during the first half of this year.
The Bureau of Economic Analysis on July 29 lowered its earlier estimate of 1.8% growth in the first quarter to a “very poor” 0.4%, Crowe said, and announced an initial estimate of 1.3% growth in the second quarter, which is also likely to be reduced in later estimates.
“The bottom line is that we’ve had some new news about the growth of the economy showing it is even slower than we thought,” he said. “The message is that things aren’t going as well as we thought they were.”
The employment picture has been especially unnerving for consumers, he said, with a “very bad and unexpected” dip in job growth below the 100,000 level in both May and June. While July rebounded to 145,000 new jobs, that is still considerably below the 200,000 to 250,000 monthly level “we have to have to nibble away at unemployment,” he said.
Crowe added that the exports that have been a “golden” part of the U.S. economy, boosted by a weak dollar and strong growth overseas, have now started to soften in response to a slowdown in the GDP growth of such major trading partners as Canada, China and Brazil.
Debt Ceiling Fight
This discouraging batch of information arrived just as “we were having a terrific fight in Washington over the debt ceiling,” he said.
The increase in the debt ceiling approved by the Congress is sufficient to carry the federal government past the presidential election, he said, but the deficit cutting in the agreement won’t help the current situation because “cutbacks in government spending mean less money revolving and moving in the U.S. economy.”
While $1 trillion in cuts have been imposed over 10 years, the deficit reductions have been concentrated in the out-years, he said, with a relatively small trim of $21 billion in spending next year.
However, the economy faces sharper fiscal constraints if the 12-member “super-committee” delegated to find another $1.5 trillion in cuts over the coming 10 years fails to complete its mission.
In that case, automatic cuts of $1.2 trillion would go into effect, and those would be spread out evenly over the period, reducing GDP growth by another 0.5%, he estimated.
(If the committee comes up with a smaller amount of cuts than required, that amount would be subtracted from the $1.2 trillion in automatic cuts.)
Crowe was less concerned about the decision by Standard & Poor's to lower the triple-A credit rating of the U.S. for long-term borrowing to AA+.
The U.S. has maintained the top rating with the two other major bond rating houses — Moody’s and Fitch — and in the aftermath of the S&P downgrade, U.S. borrowing rates actually went down instead of up. “The world did not pay much attention to it,” he said.
The S&P decision was “heavily about politics and policy,” said Crowe, and not so much about the actual dollar amounts in the package. The concern of S&P, he said, is that “the Congress and Administration can’t get along and can’t continue the process of cutting the deficit.”
Trouble in Europe
More worrisome for the U.S. economy, Crowe indicated, is turmoil in Europe over the indebtedness of Portugal, Ireland, Italy, Greece and Spain — and perhaps even France.
With the economies of Germany and France — the two biggest euro-zone nations — now at a standstill, the financial markets are asking, “Can the people who have some money in Europe continue to bail out the countries that don’t have any money?”
While this has created uncertainty about what will happen next, Crowe said, there is a “general consensus that bond holders in countries in the European union will come forward and supply sufficient liquidity.”
In the meantime, the stock markets at home and abroad have lost ground and have experienced rapid gyrations.
On top of everything else, an Aug. 9 statement by the Federal Reserve that it would keep short-term interest rates low through mid-2013 confirmed downside risks for the economy and pointed to a slower growth path.
Crowe calculated that the probability of a double-dip recession has climbed from 20% in the spring to about 35% now.
“There are too many uncertainties out there not to acknowledge that a double dip is possible,” he said.
Comparing the economy to a very slow bicycle, “the slower and slower we get, the easier it is for the bicycle to tip over,” he said. “Something could come from left field” to precipitate another downturn.
Lower Growth Forecasts
Weighing the implications of recent economic developments, Crowe said he has lowered his forecast for GDP growth to 1.6% for 2011 and 2.3% for 2012, down from 2.7% and 3.4%, respectively, in May.
Crowe said he was also lowering his forecast of average mortgage interest rates from 5.0% to 4.5% for 2011 and from 5.7% to 4.9% for 2012.
This summer’s economic tribulations also point to slower levels of housing production, with 580,000 housing starts forecast for this year, down 6% from 615,000 in the spring, and 700,000 in 2012, down 20% from the an earlier forecast of 873,000.
“We have to get the overall economy and employment market working before people will have confidence to go out and buy houses,” he said.
Watching on the Political Front
Joining Crowe in the members-only presentation — which was the largest NAHB webcast to date — Jerry Howard, the association’s CEO, warned that housing will be vulnerable in September and October when Congress returns to its efforts to cut spending.
“All hands have to be on deck to protect tax expenditures for housing,” Howard cautioned, “although the Republicans have been steadfast that this should not be about raising revenue but cutting spending.”
“The first political grenades are starting to be tossed around already on housing,” he said, citing a Washington Post front-page story suggesting that President Obama had directed his advisers to develop a proposal that would keep the government playing a major role in the nation’s mortgage market.
A Treasury Department official quickly responded that the proposal discussed in the Post story was only one of the three approaches proposed earlier this year by the Administration, and all three options were still being studied, including one that would almost fully privatize the mortgage market.
“We need people to stop this cacophony of noise where the federal government is sending messages that it will abandon the federal role in housing,” he said, which is undermining efforts to stabilize the housing market and consumer confidence.
Howard also suggested that builders would be watching for the bold economic plan that the President will present in September when Congress returns, noting that both of the White House task forces on deficit reduction called for reductions in the mortgage interest deduction.
However, he said that the White House does appear to recognize that housing is crucial to the economic recovery.
Improving Market Index
Howard announced that NAHB will be introducing in September an Improving Market Index, “showing that banks and regulators should make good loans to good people in the areas where it makes sense to do that.”
“There is no one housing market, but a series of local markets that need to be addressed.” Fostering stability in improving markets, he said, will ultimately see recovery spread to outlying markets.
Crowe said that the center of the country is recovering faster than the edges.
Texas and the plains states, whose economies are concentrated in agriculture and energy, are primed for recovery, Crowe said.
Those states also did not experience the rapid run-up in housing construction and subsequent steep declines characterizing the boom markets.