We’re expecting near-trend GDP growth during this time period.

The U.S. labor market still is performing quite well, despite the abrupt downshift in GDP growth during the early part of 2007. The overall unemployment rate held at 4.5% in May, remaining in the low and narrow range that’s prevailed since last fall, and nonfarm payroll employment increased by 157,000 — a highly respectable gain at this stage of the game. Average hourly earnings also continued to rise briskly.

Core inflation (excluding food and direct energy) has been receding recently, due in part to the slowdown in economic growth since early last year. The core price index for Personal Consumption Expenditures dipped to 2.0% (year-on-year) in April, kissing the upward bound of the Federal Reserve’s apparent comfort zone for this key inflation measure. Also, the core Consumer Price Index receded nicely in May — in line with our forecast.
 

The Fed almost certainly will hold policy steady at the next FOMC meeting on June 27-28, and NAHB’s forecast no longer anticipates a quarter-point cut at the Aug. 7 meeting.

Indeed, the futures market for fed funds now shows low projected probabilities of rate cuts at any time during 2007.

Long-term interest rates have moved up considerably during the past month, despite good news on core inflation as well as benign inflation expectations in the private sector. The Treasury yield curve now has a convincing upward slope across its entire range.

Long rates have risen as U.S. and global economies have strengthened, as the prospects for easing of monetary policy by the Federal Reserve and foreign central banks have been marked down, and as lengthening of expected durations of mortgage securities have prompted sales of Treasury bonds by portfolio managers. [return to top]
 

Single-family starts and permits both continued to trend downward in May and NAHB’s Housing Market Index continued to slip in June, falling to the lowest level since February 1991.

Large home builders, as a group, are experiencing even sharper reductions in home sales and even higher cancellation rates than the rest of the housing industry, primarily because of their relatively heavy geographic concentration in previously hot markets that now are experiencing relatively sharp reversals.

NAHB’s proprietary survey of 30 large companies shows net sales for May (seasonally adjusted) at the lowest level since late 2001 as well as cancellation rates that have moved back toward recent highs. [return to top]
 

We’re currently projecting 1.45 million housing starts in 2008, down from 1.48 million in last month’s forecast and 1.71 million in our January forecast.

The 15% downward revision since January reflects an expectation that the tightening of mortgage lending standards will exert a persistent drag on effective demand and that a rising tide of mortgage foreclosures will contribute to the inventory overhang in 2008. [return to top]
 

That means we’re looking for a major recovery process beyond the projected trough late this year. But the climb back to trend figures to be a multi-year march, within the broad economic and financial market environment that’s in the cards for the period ahead. [return to top]
 

To learn more, visit www.HousingEconomics.com. [return to top]