Slow Growth — It Still Beats No Growth
Growth of real GDP has been revised downward to an annual rate of 0.6% for the first quarter of this year, the slowest pace in more than four years. But economic growth is firming up nicely in the second quarter and recession remains unlikely during the balance of the of the 2007-2008 forecast horizon. Indeed, NAHB is  expecting near-trend GDP growth during this time frame. The U.S. labor market still is performing quite well, despite the abrupt downshift in GDP growth during the early part of 2007. The overall unemployment rate held at 4.5% in May, remaining in the low and narrow range that’s prevailed since last fall, and nonfarm payroll employment increased by 157,000—a highly respectable gain at this stage of the game. Hourly earnings also continued to rise briskly.

The minutes of the May 9 Federal Open Market Committee (FOMC) meeting show preoccupation with inflation among Federal Reserve policymakers, and NAHB’s forecast no longer anticipates a quarter-point cut at the August 7 meeting. Indeed, the futures market for fed funds now shows low projected probabilities of rate cuts at any time during 2007. Long-term interest rates have moved up considerably during the past month, despite the good news on core inflation, as well as benign inflation expectations in the private sector, and the Treasury yield curve now has a convincing upward slope across its entire range.

Long rates have risen as U.S. and global economies have strengthened, as the prospects for easing of monetary policy by the Federal Reserve and foreign central banks have been marked down, and as lengthening of expected durations of mortgage securities have prompted sales of Treasury bonds by portfolio managers. Fed Chairman Bernanke delivered two addresses recently, discussing the implications for the housing market and the overall economy. While owning up to a good deal of uncertainty, the Chairman expressed confidence in fundamental economic factors that “should ultimately support the demand for housing” — without suggesting a time frame for this ultimate outcome. [ return to top ]