The Economy: Below-Trend Growth Through 2007
Growth of real GDP has been revised upward for the second quarter. However, the pace still qualifies as slightly below trend and the composition of second-quarter GDP has sobering implications for the third quarter of the year. Below-trend rates of economic growth are in store for the balance of this year and most of 2007, although trend-like growth should be attained by 2008 (our short-term forecast now extends through 2008). Payroll employment growth has shifted to a lower pace as growth of economic output has slowed, and the unemployment rate is off its cyclical low in the second quarter of this year. Job growth should continue around recent rates for some time and the unemployment rate should move up somewhat further before receding over the latter part of our forecast horizon. Core inflation still is running above the upper bounds of the Federal Reserve’s implicit comfort zones, although recent news is reassuring and the core inflation measures still are being boosted by the perverse “owners’ equivalent rent” imputations that should be discounted by the Fed. The FOMC’s public statement on August 8 singled out “a gradual cooling of the housing market” as the most notable factor in the recent slowdown of economic growth, and concern about downside risks to housing probably was the major factor behind the FOMC’s decision to halt the monetary tightening process.
Economic developments since August 8, particularly further deterioration of housing market activity and reassuring news on core inflation, point toward another “no change” decision at the next FOMC meeting. NAHB is therefore still expecting stable monetary policy through mid-2007, followed by a bit of monetary ease. Meanwhile, fixed-income markets have feasted on the news of a slowing economy, limited inflation, and rising prospects for stable short-term interest rates. Long-term bond and mortgage rates have come down quite a bit from their mid-year highs, and we’re expecting only slight increases in coming quarters. NAHB's economic forecast rests on a number of key conditions, however, and the downside risks are considerable. These risks include the possibility of spikes in interest rates or energy prices, as well as large resales of homes, including condos, put back onto the markets by investor/speculators.
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