National Outlook

Highlights

• The U.S. economic recession now is official, according to the committee of economists that issues such rulings, and it’s fair to say that the global economy (including the Eurozone and Japan) also has slipped into recession. Indeed, the recession in the U.S. began in December 2007, it’s been gathering a lot of downward momentum since the middle of last year, and the economy has entered 2009 on a sharply downward trajectory.
  
  
• Gathering economic weakness in the U.S. has been starkly evident in the labor market. Total payroll employment started to fall last January and the losses deepened dramatically in the latter part of the year - capped off by a 542 thousand loss in December. The civilian unemployment rate has climbed aggressively as the recession has proceeded, moving up by 2.3 percentage points to 7.2 percent by December of 2008. Broader measures of labor underutilization have climbed even more during the past year.
  
  
• Inflation has retreated quite a bit in recent months, reflecting the weakening economy and labor market, stunning declines in commodity prices (particularly oil) from their summer highs, and a substantial rebound in the foreign exchange value of the dollar during the second half of 2008. Both top-line and core inflation have come down quite a bit recently, and longer-term inflation expectations in financial markets have declined as well.
  
  
• Current recessionary conditions can be pinned on the earlier spikes in oil prices, 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 recent declines in commodity prices, despite the successive rounds of monetary and fiscal stimulus delivered around the world throughout 2008, and despite some evidence of "healing" in some parts of the financial system and in some sectors of the economy (including housing).
  
  
• 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 December 16 FOMC meeting (a range of 0 to 0.25 percent) 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 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.
  
  
• The Congress, the Treasury and the FDIC also 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 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 of the situation, and our independent central bank certainly will be a cooperative factor when the economy is flagging and inflation is heading toward zero; i.e., the Fed will not attempt to offset or "neutralize" fiscal stimulus in the foreseeable future. 
  
  
• 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 (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 as well as some businesses, funding of infrastructure projects, and financial relief for state and local governments.
  
  
• There’s been a good bit of focus on the mortgage foreclosure issue and the plight of current homeowners in the public discussions over the impending fiscal package. However, stimulation of home-buyer demand has not occupied a prominent 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 assumes that some TARP funding will be used to help fight the foreclosure wave (along the lines of a recent FDIC proposal) but 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.
  
  
• NAHB’s baseline forecast for the U.S. economy and the labor market in 2009 shows a very difficult year overall, despite our fiscal and monetary policy assumptions. However, we also believe that 2009 will be a major transitional period for the U.S., paving the way for recovery in 2010 followed by a run of above-trend years in growth of output (real GDP) and employment as economic slack is worked down in a low-inflation environment.

   

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