Forecast: Lower Growth and Jobs, Higher Interest Rates, Smaller Deficits
On August 27, the Commerce Department lowered its estimate of second-quarter growth in real GDP to 2.8%, down from the “advance” reading of 3.0%. The employment report for July was surprisingly weak, and payroll job growth was revised downward for both May and June. Despite that, the economy promises to be a positive for President Bush in the November elections. According to many of the models built by economists to predict election outcomes, there are other positives as well: Incumbency usually is an advantage for presidential candidates; Republican candidates have a slight edge (everything else equal); and the party in power is well positioned unless it’s held the White House for two or more terms. This set of factors suggests that a one-term Republican incumbent ordinarily starts out with a decided advantage.

On July 30, the White House Office of Management and Budget (OMB) released its annual mid-session review of the federal budget. OMB's new projections show smaller deficits for the 2004-2009 period than had been previously forecast, particularly for 2004 and 2005. Those projections bode well for interest rates over the long term, if they are realized (the projected slow growth in nondefense discretionary federal spending may be difficult to achieve).

Meanwhile, the Federal Reserve went ahead with its widely anticipated quarter-point increase in the federal funds rate target (to 1.5%) at the August 10 FOMC meeting. The Fed recognized that a mid-year slowdown had occurred, but argued that this is a temporary problem. The tone of the Fed's statement strongly suggests that the funds rate will be raised again at the September 21 FOMC meeting as the Fed marches toward monetary "neutrality." Neutrality probably means a nominal federal funds rate of about 4.25%, and the Fed most likely will strive to achieve that by mid-2006.

NAHB’s quarterly forecasts recently have been extended through 2006. We generally expect housing and the economy to perform well over that horizon, despite the Fed’s march toward neutrality and long-term interest rates that consequently gravitate upward over much of the period. [ return to top ]