Eye on the Economy - 02/25/2009 (Plain Text Version)

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The U.S. and Global Recessions Are Deepening

The U.S. and global economies have been sinking deeper and deeper into recession, and current momentum is decidedly downward.

The U.S., Canada, Japan, United Kingdom and Euro area all have been in rapid retreat since late last year, and key “emerging” economies in Europe, Latin America and the Asia/Pacific area are increasingly involved in the broadening downswing.

China and India still are posting positive growth, although the rates of advance have slowed considerably.

It now appears that global real gross domestic product (GDP) will contract in 2009, the first drop since the 1930s.

The U.S. “officially” entered into recession in December 2007 and the economy has been deteriorating rapidly since then.

Real GDP contracted at a 3.8% annual rate in the final quarter of 2008, according to the “advance” estimate by the government, and a substantial downward revision to fourth-quarter growth is in the cards — we’re estimating a 5.7% contraction.

The first quarter of this year also will be quite weak, with negative GDP growth around 5.0%, and downward momentum most likely will extend into the second quarter as well.

Consumer Confidence Plummets to Record Low

The Conference Board’s Consumer Confidence Index fell sharply in February to its lowest level since the series began in 1967.

Consumer assessments of both the present economic situation and the outlook for the next six months contracted sharply in February, with the expectations component hitting a record low.

The Present Situation Index was driven down by worsening business conditions and a rapidly deteriorating job market. The proportion of consumers saying that jobs are “hard to get” climbed to 48% while those saying jobs are “plentiful” fell to 4%.

The outlook for employment in the months ahead also deteriorated markedly, weighing heavily on the Expectations Index.

The Conference Board asks consumers if they plan to buy a new or existing home within the next six months. The February readings were quite weak, particularly for new homes, as this series descended to the lows of 1981 and 1982. [return to top]

Housing Starts and Permits Sink to Record Lows

Housing starts and building permits have been falling for three years, and the downswing actually has accelerated in recent months — taking major measures to record lows.

Deep and broad-based declines were particularly stunning in January. Total housing starts fell by 16.8% from December to January, the year-over-year decline came to 56.2% and the decline from the January 2007 peak now stands at 80%.

Single-family starts are off by 81% from their peak rate in early 2006 and multifamily starts are down by 74%.

The multifamily sector held up relatively well until the middle of last year but now finds itself in a rapid contraction phase.

Within the single-family sector, a sharp decline of starts for-sale has accounted for the major proportion of the decline in total starts, as homes built on owners’ lots by contractors or owners have held up relatively well.

Within the multifamily sector, a sharp decline in starts for sale (condo and co-op units) have accounted for most of the recent slide, as production of multifamily rental units has held up relatively well. [return to top]

Builder Confidence Holds Near Record Low as Sales Prospects Deteriorate

The NAHB/Wells Fargo Single-Family Housing Market Index (HMI) edged up by one point in February from the record low of 8 recorded the month before. The HMI has been essentially flat at a depressed level since last November.

Both the present sales and buyer traffic measures managed small increases in February, but the index for sales during the next six months slipped to a new record low — consistent with the dismal readings on home buying plans reported by the Conference Board.

All major regions of the country had record or near-record low HMI readings in February. The HMI for the West now stands at 5, down from a cyclical peak of 91 during the home buying frenzy in fall 2005. [return to top]

House Prices Still Are Contracting Rapidly in Many Places

Major measures of national-average house price change were contracting rapidly as 2008 drew to a close and 2009 came out of the box.

The S&P/Case-Shiller National Home Price Index, based on repeat-sales of the same properties over time, registered a record 18.2% decline in the fourth quarter of 2008 on a year-over-year basis. The seasonally adjusted annual rate of decline (quarter-to-quarter) came to 23.6% for the fourth quarter, the largest on record, and the U.S. National Values index now stands 26.5% below the peak in the first quarter of 2006.

The Federal Housing Finance Agency’s national repeat-sales purchase-only House Price Index, based on data for the conventional conforming mortgage market served by Fannie Mae and Freddie Mac, was down by 8.2% in the final quarter of 2008 (year-over-year basis).

The seasonally adjusted annual rate of decline (quarter-to-quarter) came to 13%, the sharpest decline on record, and the FHFA’s National Index now stands 11% below the peak registered in the second quarter of 2007.

The median price of existing homes sold in January (based on closings) was down by a near-record 14.8% on a year-over-year basis — comprising a 13.8% drop in single-family home prices and a 20.6% decline for condos/co-ops.

Price declines were particularly striking in the West, where the single-family market was down by 25.6% and the condo/co-op market showed a 30.4% decline. [return to top]

Financial Market Conditions Still Are Quite Challenging

Financial market conditions still are quite challenging here and abroad, despite aggressive efforts by the Federal Reserve, Treasury, Congress, the White House and foreign governments to improve the functioning of national and global credit markets.

Extraordinary turmoil in equity markets largely reflects the deep problems in the credit markets, including both securities markets and depository institutions.

It’s fair to say that the efforts by policymakers have produced some success in interbank and short-term securities markets, and quality spreads have narrowed to some degree in certain components of bond and mortgage securities markets. But fear and distrust still permeate private securities markets, generally, and we’re far from any semblance of normalcy in those markets.

Lending conditions at commercial banks were reasonably accommodative during the first year of the global credit crisis that began in August 2007, but bank lending policies and standards have tightened considerably since last spring and the volume of bank loans has flattened in the process.

The Fed’s quarterly surveys of bank lending officers show a systematic, cumulative process of tightening for virtually all loan types through the end of 2008, including mortgage loans and loans to builders and developers for land acquisition, land development and construction.

The tightening of credit conditions in the banking system has occurred in spite of large injections of capital under the Troubled Asset Relief Plan (TARP) as well as massive injections of reserves by the Federal Reserve — reserves that are lying idle in interest-bearing accounts at the Fed.

President Obama has vowed to closely monitor bank use of further capital injections by the Treasury, expecting such injections to translate into more favorable lending conditions for consumers and businesses. [return to top]

President Obama’s Policy Stool Is Under Construction

President Obama has talked in terms of a three-legged stool that must be assembled if the U.S. economy is to avoid a deep and protracted recession that could degenerate into a deflationary depression. The three legs are fiscal stimulus, financial stability and mortgage foreclosure relief.

The fiscal stimulus leg now stands as a $787 billion package of spending increases and tax cuts — dubbed the American Recovery and Reinvestment Act. The second leg now consists of a broad outline of a Financial Stability Plan unveiled on Feb. 10 by Treasury Secretary Tim Geithner. The third leg, the Homeowner Affordability and Stability Plan, was unveiled by President Obama on Feb. 18.

The financial markets reacted quite negatively to passage of the fiscal stimulus legislation, being unconvinced about the stimulative powers of the package and worried about adverse impacts on the federal deficit and federal debt.

The market reaction to the Financial Stability Plan was even more negative, reflecting frustration over a shortage of details, skepticism about the effectiveness of key components of the plan and concern over a perceived anti-bank bias.

The markets had a relatively neutral reaction to Obama’s foreclosure relief plan, seeing some parts as positive but viewing other components with considerable skepticism. [return to top]

Fed Chairman Bernanke Holds Out Hope for Near-Term Recovery

Federal Reserve Chairman Ben Bernanke delivered the Fed’s Semiannual Monetary Policy Report to the Congress on Feb. 24 to the Senate and Feb. 25 to the House of Representatives.

Bernanke presented a sobering picture of the U.S. and global economies as well as of the financial systems here and abroad. He also discussed the current policy initiatives on the fiscal front, the financial stability front and the mortgage foreclosure front, and he pledged that the Federal Reserve would do everything in its power to help stabilize the economy and the financial markets.

Bernanke said that “there is a reasonable prospect that the current recession will end in 2009 and that 2010 will be a year of recovery.” But he stressed that, for this pattern to materialize, actions taken by the Administration, Congress and the Federal Reserve must be successful in “restoring some measure of financial stability.”

Bernanke went on to say that, in the view of monetary policymakers, a full recovery of the economy from the current recession is likely to take more than two or three years.

Very large gaps between actual and potential GDP are opening up, and a large degree of slack is developing in the labor markets. Furthermore, the economy still will be dealing with various imbalances in the early stages of recovery. [return to top]

NAHB’s Forecasts Share Bernanke’s Hope

NAHB’s forecast places the end of the current economic recession around the end of 2009. We’re viewing 2010 as a recovery year that will lead to a multi-year economic expansion that will achieve sustainable rates of GDP growth, unemployment and inflation.

Recent housing data have compelled a substantial cut to our housing forecasts for 2009-2010. However, the troughs for home sales, housing starts and residential fixed investment still occur within 2009, and housing figures to be an integral part of the economic recovery in 2010 as long as “some measure of financial stability” is restored. [return to top]

Plan to Attend NAHB Construction Forecast Conference

Plan to attend or watch the 2009 Spring NAHB Construction Forecast Conference & Webcast on Thursday, April 23 in Washington, D.C. to get the latest facts, insights and analysis of the housing industry.

Panels of nationally recognized experts at the day-long conference will discuss economic trends, government policies, developments in the housing industry and the results from NAHB's recent surveys.

For more information and to register, visit www.nahb.org/cfc. [return to top]

Want to Know the Housing Starts Through 2017?

Find out in HousingEconomics.com's Long-Term Forecast.

Subscribe and get downloadable Excel tables that feature the housing starts forecast, gross domestic product (GDP), demographics and more.

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