Forecast: Economic Fragility Continues
Real Gross Domestic Product (GDP) grew at a meager 0.6% annual rate in the first quarter of this year, according to the “advance” estimate released by the Commerce Department. This equaled the “final” estimate for the fourth quarter of 2007, although the composition of first-quarter GDP was much less favorable — with final sales contracting and business inventories rising. These movements suggest that negative GDP growth is likely to emerge in the second quarter of the year. 

As the threat of negative growth would justify, and as NAHB anticipated, the Federal Reserve enacted quarter-point cuts in both the discount rate and the target federal funds rate at the conclusion of the April 29-30 meeting of the Federal Open Market Committee (FOMC). The funds rate now is 2.0%, down by 325 basis points since last August, and the discount rate is 2.25%, down by 400 basis points over that span of time.  (The “penalty” rate differential at the discount window has been cut from 100 to 25 basis points.) 

The April 30 FOMC statement said that economic activity remains weak and that labor markets have softened, and projected that a combination of tight credit conditions and a deepening housing contraction is likely to weigh on economic growth over the next few quarters. But the statement also contained some heads-up on the inflation front, including reference to a recent rise in some indicators of inflation expectations. In fact, the statement moved closer to a balanced assessment of risks to the economic outlook, suggesting that the FOMC is anticipating at least a pause in its rate-cutting campaign. 

While a pause may very well be preferred by a large majority of FOMC members at this juncture, future policy decisions will be determined by incoming information on the real economy and inflation. NAHB's forecast continues to be based on the assumption that further evidence of economic weakness, combined with further erosion of core inflation, will encourage another quarter-point cut at the next FOMC meeting, June 24-25, moving the real funds rate deeper into the negative zone. Beyond that point, NAHB believes the Fed is likely to maintain a highly stimulative monetary policy stance until convincing evidence of a self-sustaining economic recovery. [ return to top ]