Eye on the Economy - 06/04/2003 (Plain Text Version)

By David F. Seiders, NAHB Chief Economist

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The economic rebound is not yet in hand …

Economic growth promises to remain “quite soft” in the second quarter, to repeat a phrase used by Fed Chairman Greenspan in testimony before the Joint Economic Committee of the U.S. Congress on May 21.

The early part of the second quarter obviously was weighed down by the war with Iraq and related concerns about terrorist backlash in the U.S., and the eagerly awaited rebound is not yet obvious in “hard” economic data despite the downshift in geopolitical uncertainties and the domestic terrorism alert in the wake of the war.

But various market “pre-conditions” are in place and May surveys are reassuring …

A number of promising pre-conditions for an economic rebound have been coming together nicely, including lower oil and energy costs (other than natural gas), a stronger stock market, lower interest rates, smaller quality spreads in the bond markets and a lower dollar on the foreign exchange markets.

Furthermore, survey measures of consumer confidence (Conference Board) and consumer sentiment (University of Michigan) rebounded in both April and May, and surveys of purchasing managers (Institute for Supply Management) suggest that contraction of the manufacturing sector slowed markedly in May while the services sector of the economy grew moderately. Surveys of both builders (NAHB) and mortgage lenders (MBA) suggest that the single-family housing market did quite well in May following a modest setback in starts of new units in April. [return to top]

Passage of the fiscal stimulus bill bodes well for near-term economic performance …

On May 23, the Congress settled on a $350 billion fiscal stimulus package and President Bush signed the package — the Jobs and Growth Tax Relief Reconciliation Act of 2003 (JGTRRA) — into law by the end of the month. The final package consisted of $330 billion in tax cuts, spread out in various creative ways through 2013, and $20 billion in federal aid to beleaguered state and local governments to be distributed over the next two years.

The outcome was at the low end of the $350-$550 billion negotiating range set up by the Congress, and well below the original $726 billion “Jobs and Growth” proposal floated by the Administration back in January. Nevertheless, the third Bush tax cut stacks up as a major domestic policy victory for the President and major economic stimulus for at least the next few years.

The impacts of JGTRRA are heavily front-loaded and could provide even more support to the economy in the second half of this year and in 2004 than the original Bush proposal. Indeed, about 85% of the $350 billion package is focused in the first three years because many tax breaks expire (sunset) after a few years.

The dividends/capital gains provisions already appear to be boosting the stock market and lowering the cost of equity capital for corporations. The (retroactive) cuts in personal income tax rates, along with “advance refunds” of the expanded child credit (beginning in July), will boost disposable income considerably and stimulate consumer spending significantly over the balance of the 2003-2004 forecast horizon. [return to top]

The Fed has talked long-term rates down and is poised to cut short rates as well …

The Fed’s unprecedented expressions of deflation concern at the conclusion of the May 6 FOMC meeting and in various forums since then have changed market expectations about future monetary policy management and have driven long-term rates downward in the process. Long-term Treasury yields are down about 60 basis points since May 6, and the long-term mortgage rate has fallen nearly as much, despite maintenance of stable short-term rates by the Fed on May 6 and during the period since then.

The Fed’s determination to insure against development of a deflationary spiral in the U.S. may very well provoke a cut in short-term interest rates at the next FOMC meeting on June 25, even though the prospects for a second-half economic rebound have been brightening — aided and abetted by recent passage of the fiscal stimulus package. NAHB’s forecast does not yet incorporate another rate cut by the Fed, but we’ve kicked the first increase in short-term rates out to May 2004 (from January 2004) and trimmed the forecasted profile of long-term rates for the balance of 2003 and 2004. [return to top]

Falling mortgage rates buoy home sales, house prices and mortgage refinancings …

It’s difficult to overstate the benefits of falling mortgage rates for housing and the economy! With respect to recent evidence, NAHB’s Housing Market Index for May showed a healthy rebound in the attitudes of single-family builders, particularly regarding the prospects for home sales in the future, because of the impacts of falling rates (and the end of the war) on the attitudes of prospective buyers. Furthermore, applications for home mortgages (MBA series) accelerated during May to new records for both the home-purchase and refinancing components.

The support to housing demand from falling mortgage rates has also bolstered house prices, a dramatic development in an economy toying with broad deflationary forces. OFHEO’s repeat-transactions national House Price Index registered a solid 6.5% (year-over-year) gain in the first quarter, continuing the process of gradual deceleration from the peak rate of increase (8.4%) in early 2001. All regions, states and major metropolitan areas posted year-over-year price gains in the first quarter, and a similar performance is likely for the second quarter of the year. [return to top]

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