December 17, 2003

By David F. Seiders
NAHB Chief Economist

 
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The overall economy appears to be in good shape as the year draws to a close …
The fourth quarter of the year is coming together about as expected. Growth of economic output (real GDP) should exceed 4% by a narrow margin, about half the third-quarter surge but still quite a positive performance.

Furthermore, payroll job growth almost certainly will be modestly positive, following nine consecutive quarterly declines, as growth in labor productivity slows down to a more sustainable pace (about 2.5%). And the unemployment rate is destined to come in a bit below the third-quarter average (6.1%), despite an increase in the average length of the workweek and a pickup in the labor force prompted by more promising labor market conditions. 

But the economy has not yet shaken off the deflation threat …
Despite improving “real” economic conditions (output and jobs) that have been driven by stronger spending patterns in the economy, major measures of core inflation (excluding food and energy) have not yet firmed up in any convincing way. Indeed, the core PPI (producer price index) edged down in November and was up only 0.5% on a year-over-year basis. The core CPI (consumer price index) also edged down in November, a highly unusual occurrence, and the year-over-year change trended down to 1.1% — the lowest reading in nearly 39 years. These price readings certainly will keep concerns about potential deflation alive in financial markets and at the Federal Reserve. [return to top]

The Fed holds short-term rates steady, downgrades labor market and pricing problems ...
As widely expected, the Fed maintained its 1% federal funds rate target at the December 9 Federal Open Market Committee (FOMC) meeting. At the same time, the Fed upgraded its assessment of the labor market since the October 28 meeting — from “appears to be stabilizing” to “appears to be improving modestly.” The Fed also downgraded its deflation concern by saying: “The probability of an unwelcome fall in inflation has diminished in recent months and now appears almost equal to that of a rise in inflation.” However, the Fed went on to repeat that the present (highly stimulative) policy stance can be maintained “for a considerable period,” since the inflation level still is quite low and there’s still a lot of slack in resource (labor and capital) markets. [return to top]

A 'considerable period' of stable monetary policy still means 'quite some time' …
It now appears that the Fed’s more positive readings on the labor market and the inflation situation may have been premature. Not only did key measures of core inflation deteriorate in November (in data released after the FOMC meeting), but the November employment report (released on December 6) was weaker than expected and weekly data on claims for unemployment insurance have not been very encouraging so far in December.

These market developments served to put a lid on long-term interest rates and quelled any concerns about Fed tightening in the near future. NAHB’s forecast still assumes that the first rate hike will occur at the FOMC meeting right after the November 2004 elections (at the earliest) and that long-term rates will gravitate upward by less than a percentage point over the course of 2004. Indeed, we expect the long-term home mortgage rate to be only about 6.5% this time next year, up from 5.9% currently. [return to top]

The housing market storms its way toward year end …
The single-family housing market has been showing great strength recently and the condo market is providing good support to the multifamily market. Sales of new homes are bound to exceed a million units in 2003 for the first time in history, and single-family housing starts (including homes built on owners’ lots) will easily set a new record (around 1.5 million units). Multifamily starts essentially held their own in 2003 (around 340,000 units), despite very high vacancies in market-rate rental housing as the condo and subsidized rental housing components performed relatively well. NAHB now estimates that total housing starts will hit 1.84 million units for the year — the highest since 1978. [return to top]

The housing outlook for 2004 has been upgraded as well …
The key drivers of the housing sector in 2003 still are pumping hard, and sales and production will have strong momentum moving into the New Year. There are some legitimate issues regarding sustainability of the exuberant fourth-quarter performance (an annualized pace of housing starts around 2 million units), but there’s little reason to expect 2004 to be way below the average pace of 2003. We’re currently expecting total housing starts to be down by 3%-4% on a year-over-year basis. [return to top]

Eye on the Economy will be offline for the holidays.
Eye on the Economy will be taking a holiday break and will not publish an edition on Dec. 31. We will resume publication and arrive at your desktop on Jan. 14. Happy Holidays. [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 provides a rigorous monthly overview of the economy, along with monthly 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.

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