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U.S. and Global Recessions Are Deepening
We’ve now got a year of economic recession under our belts and the contraction still is deepening in the U.S. Furthermore, the recession has become global as places like Japan and the Euro zone have slipped into the red and major developing countries in Asia and Latin America have lost growth momentum.
The way things are going, 2009 could experience the first decline in global gross domestic product (GDP) in the entire postwar era.
The U.S. can no longer count on exports to offset weakness in domestic final demand — like home purchases — and our trading partners are suffering badly as our demand for their exports gives way.
We’re all in it together, and earlier arguments about “decoupling” of the global economy have been thoroughly discredited.
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The Labor Market Is Taking It on the Chin
Deepening problems in the U.S. economy are starkly evident in the labor market.
Payroll employment peaked in December 2007, the first month of the recession, and the job market deteriorated systematically as 2008 rolled along. The nation lost nearly 2.6 million jobs during the year, an average of 216,000 per month, and the average loss during the fourth quarter came to a stunning 510,000.
The unemployment rate has been moving up aggressively as the recession has proceeded and climbed to 7.2% last month.
Broader measures of labor market slack, including discouraged workers and those working only part time for economic reasons, have risen even more aggressively. [return to top]
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Causes of Recession Are Many and Varied
Current recessionary conditions can be pinned on a wide range of factors, including the record spikes in oil prices earlier this year, the record-breaking contraction in housing production, the extraordinary stress in U.S. and global financial systems, the stunning declines in prices of homes and corporate equities and the demoralizing slumps in both business and consumer confidence.
The national and global recessions now are deeply entrenched, despite the most recent declines in commodity prices as well as the successive rounds of monetary and fiscal stimulus delivered around the world throughout 2008. [return to top]
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The Fed Shifts to ‘Unconventional’ Policy Tools
The Federal Reserve has been in the thick of the economic stimulus game, cutting short-term interest rates aggressively since late 2007 and rolling out an impressive series of liquidity-enhancing or market-making innovations along the way.
The Fed effectively dropped the federal funds rate to zero at the Dec. 16 Federal Open Market Committee meeting (a range of 0 to 0.25%) and sought to put downward pressure on longer-term rates by strongly suggesting that a very low funds rate will be maintained “for some time.”
Our central bank also has committed to use of unconventional policy measures to support credit markets and economic activity going forward, relying primarily on management of the Fed’s virtually unlimited balance sheet capacity. In this regard, the Fed currently is involved in large purchases of agency debt and mortgage-backed securities in order to provide support to the mortgage and housing markets. [return to top]
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The Current Policy Structure Is Inadequate
In addition to Fed activities, Congress, the Treasury and the FDIC have been delivering support to financial markets and the economy for some time.
But it’s increasingly doubtful that the constellation of policies enacted or authorized so far — including prospective actions by the Fed as well as likely use by the Obama administration of the second half of the controversial $700 billion Troubled Asset Relief Program (TARP) initiative to stabilize the financial system — can cope with the powerful downdrafts in economic activity and financial market conditions that developed late last year and that have extended into 2009.
Additional fiscal stimulus now appears to be the only way to prevent serious recession from heading toward disastrous depression, an evolution that could bring highly dangerous price deflation onto the scene (a la Japan).
Fortunately, both the new Congress and the new Administration appear to recognize the extreme seriousness and urgency of the situation. [return to top]
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More Fiscal Stimulus Is on the Way
The prospective fiscal stimulus package definitely will be big and it should be enacted quickly, although the Congressional process is bound to have some rough spots. Authorizations could approach or even exceed $1 trillion for 2009-2010, and the odds are in favor of passage by President’s Day in mid-February.
Public statements by the incoming Obama Administration and the Congressional leadership suggest that the key provisions will include extensions of unemployment benefits, tax cuts for most individuals and families (other than those earning high incomes), tax incentives for some businesses, funding of infrastructure projects and financial relief for state and local governments. [return to top]
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Housing Should Be a Prominent Part of the New Stimulus Package
There’s been a good bit of focus on the mortgage foreclosure issue and the plight of current homeowners in public discussions over the impending fiscal package.
However, stimulation of home-buyer demand has not occupied as prominent a position in the public dialogue, even though home sales and housing production continue to fall sharply and the downward spiral in home prices continues to decimate the net worth of households as well as the quality of outstanding mortgage credit.
NAHB’s current baseline (most probable) economic forecast for 2009-2010 assumes timely enactment of an $850 billion fiscal stimulus package, dominated by the key provisions outlined above. This forecast also assumes that some TARP funding will be used to help fight the foreclosure wave (along the lines of a recent FDIC proposal).
However, we’re not yet assuming passage of new supports to housing demand — such as the mortgage rate buydowns and the homebuyer tax credits being advocated by NAHB and the Fix Housing First coalition. [return to top]
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The Housing Outlook Is Contingent on the Policy Structure
NAHB’s basic assumptions regarding monetary and fiscal policy, if realized, should strengthen the economy by the second half of this year, and that process should help form a bottom for the housing market within the year — even without new fiscal measures to strengthen housing demand.
It’s important to note, however, that our baseline housing forecast is subject to considerable downside risk.
If the impending fiscal stimulus package includes the interest-rate buydowns and the home-buyer tax credits being advocated by NAHB and the Fix Housing First coalition, solid housing recovery in 2009 and beyond will be virtually guaranteed. [return to top]
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Construction Forecast Conference Webcast Available
 An on-demand webcast of the 2008 Fall Construction Forecast Conference is available for purchase.
The webcast fee includes access to the webcast archive and electronic copies of the conference handout and presentation materials. Multiple viewers in one office can purchase the webcast for one fee.
The on-demand webcast also gives viewers complete flexibility in their viewing experience — pause, skip forward and backward, or jump directly to your topics of interest.
To purchase and download the webcast, click here. [return to top]
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or to contact us directly, please visit www.NAHB.org
l ©2009, National Association of Home Builders |
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