Forecast: A Better Second Half-Year in 2003
On June 26, the Commerce Department revised its estimate of first-quarter growth in real GDP from 1.9% to 1.4%  (annual rate). This meager growth was supported primarily by consumer spending and housing, while spending by the nonresidential business sector weakened badly. Lingering geopolitical uncertainties and reluctance of corporate America to crank up spending and hiring continue to weigh on the economy. Thus, the hoped-for postwar “pop” in economic activity has not materialized, and the second quarter now shapes up as another episode of slow growth (we’re estimating 1.5%). Nevertheless, NAHB continues to believe that the encouraging set of pre-conditions, especially the double-fisted monetary-fiscal policy punch, will lead to much better economic performance in the second half of this year and in 2004.

On the monetary policy front, the Federal Reserve cut its federal funds rate target by another 25 basis points on June 25, to a 45-year low of one percent, and the Fed left the door ajar to more monetary stimulus down the line. On the fiscal front, the administration's Tax Relief act, signed into law by President Bush in May, really is a big deal for the economy in the second half of this year, because most provisions are heavily front-loaded. Analysis of the impacts is devilishly difficult, since the effects will depend on whether or not the tax changes are considered permanent.  Macroeconomic Advisors, LLC (MA) recently made an attempt to simulate the economic impacts of that tax relief legislation.  MA assumed that the cuts to personal tax rates, the special reduced rates for dividends and capital gains, the expansion of the child tax credit, and the relief from the marriage penalty eventually would be made permanent; that enhanced depreciation/expensing provisions for businesses would be allowed to expire as scheduled; and that taxpayers would behave accordingly. MA’s simulation showed that JGTRRA will boost GDP growth by about 1.2% in the second half of 2003 and 0.7% over the course of 2004. These numbers are broadly consistent with the assumptions of built into NAHB’s forecasts and are essential to achieving the 3.75% GDP growth we're projecting for the second half of 2003, and the 3.70% for 2004.

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