Good Economic News Now, and Strength in the Coming Decade
Growth of real gross domestic product (GDP) has been revised up to a robust 4.3% annual rate for the third quarter, despite substantial hurricane-related negatives in September. Hours worked in the nonfarm business sector rose only slightly in the third quarter, while productivity (output per hour) grew at an outstanding 4.7% pace. The impacts of the hurricanes on the energy markets have been fading away, removing a key economic stumbling block. GDP growth is slowing to some degree in the fourth quarter (we’re currently estimating 3.4%) and inventory investment will account for a lot of the growth, but economic fundamentals remain quite solid as we approach year-end. The employment report for November showed strong growth in payroll employment and the hurricane-affected estimates for the September-October period were revised upward to some degree. Furthermore, the unemployment rate held at 5%—another sign of a healthy national labor market—and slack in labor markets is likely to shrink a bit further as growth in economic output proceeds.
Minutes from the November 1 meeting of the Federal Open Market Committee (FOMC) suggest that the Fed is approaching the end of the rate-hike process that began in mid-2004. We saw another quarter-point increase at the Dec. 13 FOMC meeting, but monetary policy may hit neutral as Chairman Greenspan leaves office early next year. Signals from the Fed, along with Congressional testimony by the next Fed Chairman (Ben Bernanke), helped calm fixed-income markets in the latter part of November following a substantial upshift in long-term interest rates from mid-September levels. Long-term rates are likely to rise somewhat further in 2006, but the increase will be limited as long as core inflation remains under control. NAHB’s newly revised long-term forecast suggests that sustainable levels of multifamily market activity are not far below recent levels and that the foundations for the next ten years are quite strong—unless immigration policy is tightened considerably in the years ahead.
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