-
Real GDP grew at an annualized rate of 3.0% in the first quarter of this year, according to the “second” estimate released by the Commerce Department on May 27. This trend-like performance was a bit weaker than the earlier “advance” estimate (3.2%), and growth of real final sales (excluding business inventory investment) was revised down by a similar amount (from 1.6% to 1.4%).
-
Both GDP and final sales apparently firmed up to some degree in the second quarter, extending the recovery in economic output to four consecutive quarters since the apparent end of the Great Recession. We currently expect GDP growth of 3.2% as the inventory cycle loses some forward momentum while key components of private final demand gain some momentum. Spending on nonresidential structures most likely will continue on a downward slide in the second quarter, although RFI apparently has swung back into the positive zone following the first-quarter setback.
-
We expect GDP growth to remain modestly above 3% during the second half of this year, with growth strengthening to 3.5% next year (fourth-quarter to fourth-quarter) and continuing into 2012 at a decidedly above-trend pace. Healthy growth of personal consumption expenditures (PCE), which normally account for roughly 70% of GDP, is essential to achievement of our outlook for overall economic growth. We’re projecting PCE growth of 2.5% in 2010 and 2.7% in 2011 (year-over-year), in line with June’s Blue Chip consensus outlook (including NAHB).
-
The Federal Reserve’s balance sheet estimates for the first quarter of this year show the fourth consecutive advance in household net worth. The gain was due primarily to advances in the stock market and paying down debt, mainly home mortgages and consumer credit. We expect household wealth to trend up gradually over the balance of the 2010-2011 period.
-
Our current forecast assumes only modest net-negative impacts of the European Sovereign Debt Crisis (ESDC) on the U.S. economy, as declines in oil prices and interest rates largely offset negative impacts on our trade balance, and the more serious “contagion” effects in equity and private debt markets have yet to appear.
-
With respect to our housing sector, the ESDC actually has delivered benefits due to a global flight to quality (i.e., U.S. Treasury bills and bonds) and the related declines in mortgage rates. We’ve trimmed our forecasts of long-term Treasury and prime home mortgage rates through the end of 2011, but we still expect these rates to firm up from recent levels. We now expect the 10-year Treasury yield to reach 4.5% by late next year while the prime conventional conforming mortgage rate reaches 6.0%.
-
The growth in economic output (real GDP) since mid-2009 has been fed by hefty increases in labor productivity--a typical early-recovery phenomenon. However, productivity growth has been tailing off recently, and the business sector now is compelled to increase labor input to meet the growing demand for output. Payroll employment has been rising since the end of 2009, and the unemployment rate has come down from 10.0% last December to 9.7% in May.
-
But not all is rosy in the labor market. Recent growth of payroll employment was boosted by a surge in temporary Census jobs, and growth in private sector payrolls was weaker than expected. However, this setback followed a strong gain in private payrolls in April, solid increases in both April and May in aggregate hours worked and continued growth in average hourly earnings. We continue to believe that the labor market is in a sustainable recovery mode, with decent growth in employment and a gradual decline in the unemployment rate for the balance of the 2010-2011 forecast period.
-
The Federal Reserve continues to maintain a rock-bottom federal funds rate target, total assets held by the Fed still are at a record high, excess reserves in the banking system still exceed $1 trillion, and the Fed recently reestablished U.S. dollar liquidity swap lines with the ECB and other major central banks to help ease new-found strains in U.S. dollar funding markets. In essence, the Fed’s “exit strategy” has yet to be implemented. Indeed, the ESDC, the huge degree of slack in the labor market and recent disinflation, strengthen the case for maintenance of maximum support to the economy. We continue to believe that the first increase in the funds rate won’t be until the second quarter of next year, and the ESDC could push it to later.
-
Despite the evolving economic recovery, reviving consumer confidence, historically low mortgage rates and excellent affordability conditions, there’s still considerable uncertainty about the U.S. housing market. With respect to supply, homeowner and rental vacancy rates still are running quite high, there’s a large “shadow inventory” of vacant units held off the markets, and the foreclosure wave continues to dump large numbers of vacant units onto the markets. With respect to demand, fundamental conditions have been obscured by shifting weather conditions and the series of temporary tax credits that have affected the timing of home purchases since early last year. Furthermore, key measures of home prices have been throwing off mixed signals in recent months.
-
Sales of existing homes increased in March and April, and the gain in pending sales in April points to a strong sales (closings) in May and June. Sales of new homes also posted sizeable gains in both March and April, presumably in anticipation of the expiration of the homebuyer tax credit. But NAHB’s proprietary survey of large single-family home builders showed fallbacks in May, and NAHB’s broad-based single-family Housing Market Index retreated in June. Everything considered, we’re expecting a bit of slippage in the third quarter, followed by substantial gains late this year and in 2011.
-
Starts of single-family homes trended upward from the cyclical low early last year through April of this year. But expiration of the final tax credit at the end of April led to a sharp contraction of starts and single-family building permits in May. These developments, along with downshifts in NAHB’s survey measures for May and June, have compelled us to cut our estimate of single-family starts for the second quarter and third-quarters.
-
Multifamily starts posted a better-than-expected performance in May. As a result, we’ve bumped up our forecast for the final three quarters of this year, but still end the year with a record low. Our estimate of total housing starts for 2010 now stands at 656 thousand units and the production of all new housing units (including HUD-Code manufactured homes) stands at 714 thousand--up by 18% from the record low last year.
-
Looking ahead to 2011, we’ve retained our forecast of 991 thousand housing starts (841 single-family) and 81 thousand manufactured homes. The production of new housing units, along with an expanding remodeling market and rising brokers’ commissions on home sales, result in strong growth of RFI throughout 2011, helping to generate the above-trend growth of GDP that’s in our baseline (most probable) forecast.
Full Report
Please note: This information is available only to HousingEconomics.com subscribers. Download free Samples.
Instant Online Access Now!
