January 15, 2003

By David F. Seiders
NAHB Chief Economist

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The “soft patch” felt more like a swamp …
Early last November, Federal Reserve Chairman Alan Greenspan declared that the U.S. economy had hit a soft patch as “heightened geopolitical risks” were weighing heavily on both businesses and consumers. At that time, the risks pertained mainly to the situation in Iraq. But as 2002 wound down, the potentially explosive situation in North Korea added to the tensions, and political upheaval in Venezuela piled on as world oil markets were rocked by a massive strike in that country.

It’s perfectly clear that the economy really bogged down in the final quarter of 2002. GDP growth ground to a virtual halt, following a promising third quarter (4%), and the job market weakened considerably after posting some modest improvements in earlier months. The heightened international tensions definitely spurred another round of cost-cutting by American businesses, deterring hiring as well as investment, and consumer confidence was driven to a cyclical low in the fourth quarter by the downshift in the job market and concerns about foreign conflicts and associated increases in terrorism at home.

But interest rates fell further and housing plowed ahead …
The economic downshift that emerged in the latter months of 2002 provoked yet another downshift in the interest rate structure, strengthening the key shock absorber for the U.S. economy. The Fed cut short-term rates by half a percentage point in early November, and long-term rates gravitated downward throughout the fourth quarter to truly historic lows (the long-term mortgage rate slipped to 5.85% by year’s end). Those rate declines helped to weaken the dollar on the foreign exchange markets (that’s good for the economy), support stock and bond prices, and spur the single-family housing market.

Home sales (new and existing) and single-family housing starts were quite robust in October and November, and surveys of both builders and mortgage lenders point toward a strong close for 2002. Thus, the housing production component of GDP provided good support to the economy in the fourth quarter, helping to keep growth in the black (if only marginally). It is also clear that the low interest rates kept house prices moving and mortgage refinancing in high gear, and that cash-out refis and other ways of tapping housing equity continued to support consumer spending.

The Commissioner of the Bureau of Labor Statistics, Kathleen Utgoff, singled out the positive contributions of housing when discussing the dismal employment report for December and the slippage in private nonfarm payrolls (438,000) over the course of 2002. She noted that mortgage banking and real estate brokerage had combined to add 82,000 jobs in 2002, and that overall construction employment had been maintained by “robust homebuilding activity” while nonresidential construction had contracted dramatically. [return to top]

Rotation in sources of growth is critical to stronger recovery in 2003 …
The consumer, housing and government sectors have carried the hesitant economic recovery to this point. We are forecasting a stronger economy and a stronger job market in 2003-2004, but other sectors have to kick in for this pattern to be realized. The key to sustained expansion is the nonresidential business sector, since it’s going to be hard to squeeze much more growth support from the American household. And while spending by the federal government promises to remain strong, particularly on defense and homeland security, spending by state and local governments is in a contraction phase because of mounting deficits in operating budgets across the country.

There were some promising signs of revival in business capital spending toward the end of 2002, and the purchasing managers index for December (ISM survey) threw off some surprisingly positive signals for the manufacturing sector. But promising signals have been sent before, only to be dashed again and again, and large cuts in manufacturing employment throughout the fourth quarter hardly bolster confidence about a near-term rotation of growth support toward the nonresidential business sector. [return to top]

A worried President proposes major tax changes to ensure a stronger recovery…
On January 7, the Bush administration unveiled a “Growth and Jobs Plan” and called on Congress to act swiftly to pass it. The major components would 1) make all tax cuts that were enacted in 2001 but delayed to future years effective at the beginning of 2003 and permanent, and 2) eliminate the double taxation of corporate income. The estimated 10-year cost of the entire package comes to $674 billion.

If enacted as proposed, the President’s plan would strengthen economic growth and the job market and the stock market in 2003-2004, while also increasing the federal budget deficit and putting some upward pressure on interest rates. While the long-term effects are open to question, there’s no doubt that timely passage would deliver substantial economic positives prior to the 2004 elections.

The President’s plan contains nothing specific to housing, and NAHB immediately noted the omission of a new homeownership tax credit that seemed to have some chance for inclusion. The short- and long-term impacts of the plan on the housing sector certainly could be a mixed bag. There is the likelihood of short-term positives from a stronger economy. There is also the possibility of long-term negatives from higher interest rates, devaluation of the mortgage interest and property tax deductions (via lower marginal tax rates), and reductions in the relative advantages of investment in owner-occupied housing over business fixed investment (via elimination of double taxation of corporate income). The new tax treatment of corporate income also could reduce corporate demand for low-income housing tax credits as well as market demands for tax-exempt bonds, possibly weakening the two principal policy supports to the affordable rental market.

It is much too early to tell exactly what will be enacted into law, or when a bill will be passed. But the Administration is in the driver’s seat, and it seems likely that a package resembling the President’s plan will make its way through the political and public-relations processes by Memorial Day. We’ll adjust NAHB’s forecasts as the details and timing firm up. For now, the positive prospects greatly reduce the chances for a double-dip recession in 2003, barring disasters on the geopolitical/terrorism fronts. [return to top]

Want more in-depth information? Find it in our publications ...
Find more in-depth information in our three economics publications, Home Builders Forecast, Housing Market Statistics, and Housing Economics. All are availaible by subscription. 

  • Home Builders Forecast includes analysis of single-family and multifamily residential activities, residential remodeling, and the full range of nonresidential construction, as well as the macroeconomic factors such as GDP, employment, and interest rates that drive construction. If your business depends on reliable estimates of housing starts, construction spending, and remodeling activity, Home Builders Forecast is designed to meet your needs.
  • Housing Market Statistics contains an overview of important developments and trends that serves as an executive summary of the current industry situation. It also contains annotated charts depicting movements in key indicators and tables providing monthly, quarterly, and annual data for more than 250 variables.
  • Housing Economics is our monthly rigorous overview of the economy, data for more than 100 local markets, and in-depth analyses of the niches and nuances of home building markets. Available online or in print, it is written in terms that builders, manufacturers, and housing finance professionals can understand and apply to their own businesses.

To learn more or to order any of these three NAHB economic publications, visit the Economics Publications Information section of the NAHB Web site or call 800-223-2665. [return to top]

For more information or to contact us directly, please visit www.NAHB.org l ©2003, National Association of Home Builders