Economy Headed For Stability
Monthly data show that growth of the U.S. economy picked up strongly in July (following a disturbing decline in June) and remained solid in August and September as well. NAHB is estimating 4.1% annualized growth in real GDP for the third quarter, up from 3.3% in the second, and definitely in the above-trend range that has positive implications for the labor market. Although payroll employment was disappointing in September, it has become clear that the numbers were depressed by the series of hurricanes in the southeast; weekly data on unemployment claims suggest that job growth picked up again in October.

Recently, the Federal Reserve  described risks to sustained economic growth and price stability as “balanced,” characterized its policy stance as “accommodative,” and said further rate increases would occur at a “measured pace” on the path back to monetary neutrality. NAHB’s forecast includes one more quarter-point hike in the federal funds rate this year — that was done at the Nov. 10 FOMC meeting — despite prospects for some slowdown in the fourth quarter. After all, with the recent firming of core inflation, the current federal funds rate (1.75%) is essentially zero in real terms. There’s been a good deal of speculation about the recent record-high oil prices and their possible impact on monetary policy. Although the Fed undoubtedly will pursue a more stimulative policy if oil prices truly threaten economic expansion, Fed Chairman Alan Greenspan went out of his way to say that this is not  imminent. Indeed, he attributed the recent run-up in oil prices largely to Hurricane Ivan and said that “part of the recent rise in spot prices is expected to wash out over the longer run.”

NAHB still expects the Fed to achieve neutrality by mid-2006, with a nominal federal funds target of 4.25%. Despite an increase in short-term rates, long-term interest rates actually have receded since mid-year, although they are likely to begin gravitating upward before long. NAHB is forecasting a quarter-point increase in bond rates by year-end, followed by another percentage point increase during 2005. [ return to top ]