The National Outlook

Highlights

• The dramatic contraction in final demand for goods and services produced in the U.S. is running out of steam as both domestic and foreign components are firming up, and the sharp contraction of business inventory investment is moving behind us. As a result, real GDP is stabilizing, modest growth is in the cards for the balance of the year, and above-trend GDP growth most likely will emerge by the middle of next year as gradual economic recovery evolves into bona fide expansion -- without additional fiscal stimulus. Indeed, tremendous slack in resource markets provides the potential for strong growth of GDP in 2011 and beyond.

• The U.S. labor market has continued to weaken substantially, and further deterioration is inevitable during the early stages of recovery in real GDP as the productivity of labor (output per hour) stages a typical cyclical upswing. Payroll employment most likely will continue to contract over the balance of this year, albeit at a progressively slower pace, and the nation’s unemployment rate is not likely to top out before early 2010. Our revised and extended short-term forecast shows systematic improvements in labor market conditions during most of 2010 and 2011, although plenty of slack is bound to remain in labor markets at the end of the forecast period.

• Evolution of the Great Recession has fostered a major slowdown in consumer price inflation (i.e., disinflation) and has even raised the spectre of destructive deflation in the U.S. economy. Top-line and core inflation are bound to trend somewhat lower during the coming year, owing largely to falling unit labor costs. But our forecasts for real GDP, the labor market, the dollar and key commodity prices point toward some firming of key inflation measures, along with passage of the deflation threat, by 2011. Recent forecasts by policymakers at the Federal Reserve are consistent with those patterns.

• The Fed continues to hold the federal funds rate at a rock-bottom level, and we expect that pattern to extend into 2011. The Fed also continues to employ innovative means to improve the functioning of private credit markets and to lower longer-term interest rates via various unconventional "balance sheet" activities. These activities have not been inflationary, despite massive increases in commercial bank reserves and the monetary base, and Chairman Bernanke recently assured the Congress that the Fed has developed appropriate "exit strategies" to neutralize potential inflationary consequences of stimulative monetary policies before inflationary pressures actually materialize.

• The Fed's efforts to date, along with similar initiatives by foreign central banks, have contributed mightily to major improvements in financial market conditions, following the massive shocks that rocked global and domestic financial markets last fall. Substantial improvements have shown up in the interbank and commercial paper markets, corporate stock and bond markets and home mortgage markets, although persistent concerns about credit quality still weigh on the higher-risk components of the markets. The Fed also has helped to jump-start private asset-backed securities markets for certain types of consumer and small-business loans via its TALF program.

• The Fed's presence in the Treasury bond markets has helped keep longer-term Treasury yields in a reasonably narrow range, despite investor concerns about heavy Treasury issues to finance the burgeoning budget deficit as well as concerns about the durability of foreign capital flows into the Treasury market. The Fed presumably will carry through with previously announced plans to purchase long-term Treasuries as well as housing agency debt and mortgage-backed securities, and foreign capital flows are not likely to falter significantly. We expect only modest upward pressure on 10-year Treasury yields across the short-term forecast horizon, and the spread between the prime fixed-rate mortgage and the 10-year Treasury bond is likely to narrow to some degree.

• Falling mortgage rates and falling house prices have lifted measures of housing affordability to record levels, and temporary tax credit offered by the federal government as well as by a few state governments (including California) have provided effective incentives to prospective home buyers. As a result, surveys of consumer sentiment have shown improvements in assessments of home buying conditions since early this year, despite the deepening recession and accumulating job losses.

• It's now clear that sales of both new and existing homes hit bottom in the first quarter of this year, and improvements were recorded in the second quarter. NAHB’s surveys of single-family builders point toward further improvements in the months ahead, although the takeoff in home sales promises to be rather lackluster by historical standards -- at least in its early stages. Further erosion of national average home prices is virtually inevitable in the second half of this year, although the pace of deterioration should slow significantly.

• Single-family starts and permits also hit bottom in the first quarter, at record low levels, and registered some improvement in the second quarter -- despite evidence of further declines in house prices in many areas and persistence of heavy supplies of vacant units on for-sale markets. We expect single-family starts and permits to continue on an upward path, although the degree of improvement most likely will be constrained by persistent supply-demand imbalances (including the foreclosure wave) as well as by tight conditions in the markets for credit to buy and develop land and to construct homes (the AD&C markets).

• Multifamily starts and permits were slow to give ground during the housing contraction, but recent numbers have been quite weak and excess supplies in both rental and condo markets point toward further erosion in the near term and grudging recovery further down the line. Shipments of manufactured homes also are down to record lows, with little prospect of near-term recovery. Indeed, total production of new housing units (single-family, multifamily and manufactured) still is around the cyclical low, and we expect this measure to remain well below trend through the end of 2011.

• The housing production component of GDP, Residential Fixed Investment, undoubtedly exerted another sizeable drag on economic growth in the second quarter of this year, but small positive contributions are in the cards for the second half. Much larger contributions should be made in 2010 and 2011, as well as in more distant years, as RFI continues on the long recovery back toward trend levels grounded on demographics, replacement needs and the demand for second homes.

• Our short-term baseline (most probable) forecasts for housing and the economy, now extended through 2011, naturally are subject to risks that increase in magnitude as the time frame lengthens. Even the close-in forecasts are subject to unusually large degrees of uncertainty, due to the unique features of the Great Recession, the boom-bust housing cycle and the government responses. But there are reasonably predictable long-term trends for housing and the economy that dictate the direction of movement once we break loose from the worst economic and financial market debacle since the 1930s!

Full Report

Please note: This information is available only to HousingEconomics.com subscribers. Download free Samples.

Instant Online Access Now!

< Previous Article | Next Article >

[ return to top ]