NAHB Economic Forecast
Incoming data clearly show that a fourth-quarter downshift in economic growth is inevitable.  We’re currently forecasting 1.1% GDP growth for the current quarter, following 4.0% in the third quarter, and a disappointing employment report for November (released on December 6) suggests that the fourth-quarter setback could be even more serious. But it still seems likely that economic growth will begin to pick up early next year, paving the way for a stronger recovery process that will soak up slack in the labor markets during 2003 and 2004. The Federal Reserve’s aggressive monetary policy stance certainly will help get the economy back in gear, as will strength in government spending. NAHB’s forecasts show GDP growth moving into the 3.5% to 4.0% zone by the second quarter of 2003, enough to start moving the unemployment rate off its cyclical highs. The situation in Iraq still poses substantial risk to the economic outlook, but uncertainties about the ultimate outcome should be settled (one way or the other) by early next year.

Meanwhile, the Fed’s rate cut on November 6 took the federal funds rate to a 41-year low (1.25%) and pushed the “real” funds rate into negative territory despite very low rates of inflation. This has prompted concerns that the Fed is running out of monetary ammunition at a time when destructive price deflation is lurking just beyond the horizon. The plight of the Japanese economy has fueled these concerns. Japan has been drifting in and out of recession for more than a decade while price deflation has been deepening and not even a zero overnight interest rate can stem the tide. Those who see the U.S. going the way of Japan argue that the Federal Reserve should resort to extraordinary measures sooner rather than later. Many would have the Fed focus on reducing long-term interest rates by buying Treasury bonds in its open-market operations, a strategy that was used occasionally in the past with only modest success. But the Fed has made it clear that deflation in the U.S. is not really a serious threat at this time and that the economy is likely to emerge from its current “soft patch” before long. Thus, don’t look for extraordinary measures from the Fed. Indeed, look for stable monetary policy — not only in December of 2002, but early in 2003 as well. 

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