December 15, 2004

By David F. Seiders
NAHB Chief Economist

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The U.S. economy continues to move ahead at a good pace despite considerable complications …
Growth of U.S. economic output (real Gross Domestic Product) averaged 3.9% for the first three quarters of 2004, strong enough to generate systematic improvements in the labor market. NAHB’s forecast shows further above-trend growth (3.7%) in the final quarter of the year.

Good GDP growth has been maintained despite waning stimulus from the 2003 tax-cut legislation and despite the turnaround in monetary policy since mid-2004. The economy also has endured tepid readings on consumer confidence/sentiment, a situation provoked partly by world-class spikes in global oil prices as well as in home heating oil costs and gasoline prices at the pump.

The resilience of the U.S. economy in the face of formidable problems in energy markets relates partly to reduced dependence of our economy on petroleum, compared with earlier times. The resilience also suggests that many businesses and consumers expect elevated oil and gasoline prices to be temporary and have not adjusted their behavior to the higher prices. Fortunately, energy costs recently have come off their record highs, and NAHB’s forecast assumes further declines in 2005.

Mixed signals on November employment mask positive trends in the job market …
The employment report for November, released by the Labor Department on Dec. 3, revised payroll job growth downward for September and October and contained a weaker-than-expected gain for November (112,000). Furthermore, the length of the average workweek slipped a bit (unexpectedly) and the index of aggregate hours worked in the nonfarm business sector declined by 0.2 % — a significant amount. The weaker-than-expected signals were rounded out by a meager 0.1 % increase in aggregate hourly earnings, the smallest monthly gain this year.

Despite these downbeat signals, the payroll survey for November really wasn’t all that bad — at least in terms of longer-term trends. More than 2 million jobs have been created so far this year, a monthly average gain of 170,000, and the average for the October-November period stands at 207,000. Furthermore, other labor market indicators point toward ongoing improvements in the labor market, and we expect payroll job growth to average 200,000 per month during the coming year.

The portion of the November labor market report that’s based on a survey of households (rather than business establishments) actually was quite good. The unemployment rate declined by one-tenth to 5.4 %, reflecting a robust gain in civilian employment (483,000) that outpaced a healthy increase in the civilian labor force (439,000). Everything considered, the labor market still appears to be moving ahead at a decent pace. [return to top]

Inflation pressures continue to build, but recent ‘core’ readings are not alarming …
Inflation pressures have been building since late last year, driven in recent months by large increases in prices of food and energy. Core inflation (excluding food and energy) also has gravitated upward, catching the attention of financial markets as well as our central bank (the Federal Reserve).

Key measures of core inflation were running in the 1.5%-2.0% range in October, measured on a year-over-year basis, and the Fed’s favorite measure (the core price index for Personal Consumption Expenditures) was at the lower end of that range. Only the Producer Price Index (PPI) currently is available for November, but movements in the core PPI reinforce the evolving story of upward pressures on wholesale prices that eventually will feed into the core consumer prices that the Fed cares about most.

The12-month change in the core PPI for finished goods edged up to 1.9% in November, still low by historical standards but up from only 0.5% a year earlier. U.S. producers apparently are regaining some pricing power, presumably aided by the downward trend in the exchange value of the dollar and improving economic conditions abroad. [return to top]

The Fed hikes short-term rates again, and there’s more to come …
As expected, the Fed enacted another quarter-point increase in its federal funds rate target at the Dec. 14 meeting of the Federal Open Market Committee (FOMC). This was the fifth consecutive increase since June 30, taking the funds rate to 2.25 % and the bank prime rate to 5.25 %.

The Dec. 14 FOMC statement contained assessments of risks to the short-term economic outlook that were identical to the assessments made at the Nov. 10 meeting, and the statement continued to talk about a “measured” pace of future rate hikes — as the Fed continues to remove monetary policy “accommodation” from the financial system. The Fed’s reading of current economic conditions continued to show positive assessments of economic growth and labor market conditions as well as limited concerns about inflation and longer-term inflation expectations.

The real (inflation adjusted) federal funds rate now is positive, but monetary policy still is highly accommodative. Thus, there’s a significant probability of another quarter-point hike in the federal funds rate at the next FOMC meeting on Feb. 2, and NAHB’s forecast incorporates that adjustment. We’re still projecting a funds rate of 3.5% by the end of next year and a peak of 4% by mid 2006. [return to top]

Mortgage rates remain historically low despite the Fed rate hikes …
Long-term interest rates, including rates on fixed-rate home mortgages (FRMs), remain quite low despite the systematic tightening of monetary policy since mid-year. Indeed, the FRM rate now is around 5.7%, more than half a percentage point below its mid-year level.

Adjustable-rate mortgage (ARM) yields also have remained historically low despite the hikes in short-term rates by the Fed. The one-year Treasury indexed ARM now averages 4.1%, the same as at the middle of the year. [return to top]

The housing sector cruised toward new records in 2004 …
Excellent financing conditions continue to buoy the housing markets. Home sales, housing starts and issuance of building permits were all quite positive in October (latest data available). NAHB’s monthly surveys of single-family builders showed maintenance of high levels of market activity in both November and December. The Mortgage Bankers Association’s weekly surveys of home mortgage lenders also show maintenance of historically high levels of lending for home purchase (through Dec. 10).

The strong forward momentum in late 2004 ensures record levels for home sales and single-family starts for the year as a whole. Furthermore, both the condo component of the multifamily market and remodeling of owner-occupied homes are bound to post new records in 2004. Everything considered, residential fixed investment promises to make another sizeable contribution to GDP growth in the fourth quarter, rounding out robust growth of nearly 10% for the year as a whole. [return to top]

‘HousingEconomics Online’ provides in-depth analysis of housing market.
"HousingEconomics Online" is NAHB's is a new online publication from the NAHB Economics Group that provides the latest housing economic data, trends and key events that shape the economy. NAHB’s leading economists analyze and synthesize the housing and economic information to provide in-depth analyses of the niches and nuances of the home building market.

Available at, "HousingEconomics Online" combines unique scientific research with practical applications providing insights that are original, useful and written in terms that builders, manufacturers and housing finance professionals can understand and apply to their own businesses.

This interactive Web site at the executive level provides critical data and information quickly, easily and frequently and includes the following features:

  • Home Builders Forecast
  • The Desktop Analyst
  • Access to NAHB’s Staff of Economists
  • Seiders' Report
  • NAHB Economic & Housing Forecast 
  • Housing Activity
  • Housing Policy Focus
  • Multifamily Housing Quarterly
  • State and Metro Focus 
  • Housing Market Statistics

For more details, go to [return to top]

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