Signs of a post-war economic rebound are hard to find …
The eagerly awaited economic rebound in the wake of the war with Iraq has not yet materialized, despite the downshift in “geopolitical uncertainties.”

To be sure, we’ve seen a number of promising post-war developments, including lower oil/energy costs, a stronger stock market, lower interest rates and quality spreads in the bond markets, a lower dollar on the foreign exchange markets and rebounds in measures of consumer confidence/sentiment. These are welcome “pre-conditions” for an economic rebound.

However, spending patterns in the U.S. economy still are quite weak, and weekly data on unemployment insurance claims suggest that the job market still is losing ground.

Economic fundamentals still are weighing heavily on the economy …
Perhaps it’s just too early to see evidence of an economic rebound. After all, President Bush didn’t declare an end to major military operations in Iraq until May 1.

But it’s more likely that too much of the pre-war economic weakness was pinned on those dratted geopolitical uncertainties, with too little blame placed on deep-seated problems that still are hanging over the U.S. and global economies following the excessive binges that led up to the recession of 2001. The bursting of the stock market bubble still is reverberating through much of the economic system, and measures of excess industrial capacity recently rose to 20-year highs.

It’s becoming painfully obvious that success in the war effort simply is not enough to spur corporate America into the kind of spending and hiring mode that’s necessary to carry the economy forward on its own. [return to top]

More federal policy stimulus is needed to keep the economy moving …
The lackluster economic recovery recorded so far has relied very heavily on extraordinary double-barreled doses of monetary and fiscal policy fired off in rapid succession since early 2001. The Federal Reserve has slashed short-term interest rates to historic lows in order to cushion the impacts of bursting bubbles and other forces. The Bush administration has cut taxes in previous years and continues to push for more cuts. And outside forces have spurred federal spending on defense and national security.

More federal policy stimulus now appears imminent, and the economy certainly needs it — partly because of a newfound fiscal drag from beleaguered state and local government budgets that have fallen into serious deficit around the country. [return to top]

The Fed should ease monetary policy to counter rising risks of deflation …
The Federal Reserve held short-term rates steady at the May 6 FOMC meeting. However, the Fed installed a risk assessment slanted toward weakness and fingered price deflation as the major emerging threat to the U.S. economy — a threat that has been accentuated by price data released since then (the April PPI and CPI reports).

The Fed’s unprecedented deflation slant put immediate downward pressure on long-term interest rates (presumably a deliberate effect) and opened the door to near-term cuts in the short-term rate that have been the normal focus of monetary policy (i.e., the federal funds rate).

Fed Chairman Alan Greenspan said nothing to alter this interpretation during testimony before the Joint Economic Committee on May 21, and there’s a better-than-even chance (priced into the fed funds futures market) that the Fed will cut the federal funds rate target at the next FOMC meeting on June 25. Greenspan also said the Fed is considering the use of unconventional monetary policy weapons, including frontal attacks on longer-term interest rates in open market operations. [return to top]

Congress is groping toward a much-needed economic stimulus bill …
Both the House and the Senate have passed their respective versions of tax-cut legislation, and the process now goes to conference. It’s likely that a bill, with total cuts in the $350-$550 billion range, will be enacted around mid-year.

The package certainly will be smaller than the original $726 billion package proposed by the Administration back in January, primarily because of major scaling-back of the Bush plan to eliminate double taxation of corporate income. But common elements of the House and Senate bills (cuts in marginal tax rates, increases in the child tax credit and relief from the marriage penalty) should provide decent short-term support to the economy. The Senate bill also includes immediate fiscal relief for states, a provision that has a good chance for enactment. [return to top]

The housing sector continues to defy economic weakness and deflationary forces …
Both single-family housing and remodeling activity continue to pace a truly remarkable performance by the housing sector of the U.S. economy. Indeed, broad-scale economic weakness has bestowed benefits on the interest-sensitive housing market, buoying home sales and stimulating waves of mortgage refinancings that have freed up huge amounts of accumulated housing equity to support spending on remodeling (and other things) by homeowners.

The support to housing demand from falling mortgage rates (now below 5.4%) also has bolstered house prices, a dramatic development in an economy toying with broad deflationary forces. Indeed, median prices for existing homes sold posted a solid 7% increase (year-over-year) in the first quarter, equivalent to the performance for all of 2002.

Housing starts retreated by 6.8% in April, prompting speculation about fundamental problems emerging in the heretofore resilient housing sector. But most of this decline was in the volatile multifamily sector. Furthermore, issuance of building permits was up for both single-family and multifamily housing, and the backlog of unused permits rose substantially in both components of the market, providing a strong foundation for starts in May.

To top things off, NAHB’s Housing Market Index for May showed a healthy rebound in the attitudes of single-family builders, particularly with respect to the prospects for home sales in the future. [return to top]

Want more economic 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]