February 26, 2003

By David F. Seiders
NAHB Chief Economist

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Consumer confidence plummets, but the housing market dodges even this blow ...
The index of consumer confidence (Conference Board series) contracted sharply in February, falling to the lowest level in nearly 10 years. Consumers’ assessments of current economic conditions deteriorated badly, while expectations for the next six months were considerably more pessimistic than a month earlier. Indeed, the Conference Board said the February data “paint a gloomy picture of current economic conditions, with no apparent rebound on the short-term horizon.”

A pessimistic assessment of the job market was a big factor behind the February decline in consumer confidence, and deterioration of consumer income expectations fed the decline. A profoundly weak stock market and sharply rising costs of gasoline and fuel oil also weighed heavily on consumer confidence. The overriding issues, of course, relate to the rising tide of international tensions and related prospects for domestic terrorism. War with Iraq now appears imminent, North Korea is piling on with missile tests and nuclear threats, and nobody knows when our government’s “state of alert” for domestic terrorism may move from orange to red!

The single-family housing market, supported by mortgage rates that have shifted downward once again, apparently is coping well in a difficult environment. Sales of existing homes hit a record high in January, NAHB’s Housing Market Index was well maintained in early February, and applications for home mortgages (MBA series) were quite good through the third week of the month (especially for refinacings which are little affected by adverse weather conditions).

Geopolitical concerns are translating into caution by both consumers and businesses ...
Recent polls (by major media and the Federal Reserve) clearly show that Americans’ fears of domestic terrorism are on the rise amidst growing international tensions and the heightened state of alert from U.S. authorities. About three-fifths of respondents think the threat of terrorism against the U.S. will increase if the U.S. takes military action against Iraq, and nearly two-fifths of those polled think that another terrorist attack in the U.S. is “very likely.”

While American households are increasingly concerned about war and domestic terrorism, consumer behavior has been remarkably adaptable and resilient. Recent polls show that about 90% of households say they have been keeping “life as usual.”

However, many business firms (about 40%) reportedly have hunkered down and cut hiring and spending plans as geopolitical uncertainties have risen. Federal Reserve Chairman Alan Greenspan recently told Congress that the impact of intensifying geopolitical risks on the behavior of American businesses is a serious near-term economic issue. Greenspan also said that the Fed expects the economy to perform better when these uncertainties diminish, even if that means war, and that further monetary or fiscal stimulus may not be necessary to get the U.S. economy on a decent growth track. [return to top]

It’s time to put both war and fiscal stimulus into NAHB’s forecasts ...
The probability of war has been increasing and the economy needs fiscal stimulus, no matter what Chairman Greenspan says about that. Thus, NAHB’s baseline (most probable) forecast now assumes that the U.S. (and willing allies) attack Iraq by early March, that the bulk of the hostilities is concluded during March, that the outcome is conclusive and favorable to the U.S., and that an indefinite occupation period follows the war. This assumption automatically injects additional defense spending into the economic equation for both 2003 and 2004.

We’re also assuming passage, by July 1, of major portions of the President’s “Jobs and Growth” tax proposals that were unveiled in early January. For now, we’ve assumed passage of the components relating to marginal tax rates, expansion of the 10% tax bracket, the marriage penalty, child credits and expensing of equipment by small businesses, and we’ve thrown in $15 billion in grants-in-aid to state and local governments in 2003-2004. We'll watch Congress more before determining how to account for the President's plan to eliminate the double taxation of corporate income.

With respect to monetary policy, we’ve delayed the first upward adjustment to the federal funds rate until the fourth quarter of this year and reduced the cumulative tightening process through the end of 2004. This pattern of Fed behavior helps hold down the entire interest rate structure in 2003 and 2004. [return to top]

We’re coming out of the fog onto higher ground ...
A forecast scenario incorporating our new assumptions on war and fiscal stimulus shows an economy weighed down by oppressive uncertainties until the outcome in Iraq is conclusive. However, when these uncertainties lift and fiscal stimulus kicks in, the economy rebounds aggressively as long as domestic terrorism does not rise up and thwart recoveries in consumer/business confidence and the stock market. Our new forecast shows strong GDP growth and a nice recovery in the job market in the second half of 2003 and during 2004, before the Fed moves in to ensure that inflationary pressures do not become destructive to long-term economic performance.

The housing sector, which has turned in a remarkably positive performance so far, should perform quite well in the war/fiscal stimulus scenario. Indeed, NAHB’s forecasts for housing starts now show 1.69 million units for 2003 (off only 1% from 2002) and 1.65 million for 2004, with single-family starts above 1.3 million in both years.

It should be obvious that economic forecasting is quite difficult in the current environment, and it’s easy to quarrel with our new set of forecast assumptions. Stay tuned! [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