Forecast: The Economy Is Moving Through Rough Waters

Economic growth improved in the second quarter of 2008, but the economy now is traveling through rough waters that could tip it into mild recession before the ship steadies next year. The economy is being whipsawed by volatility in energy prices and financial markets, a deepening housing contraction, and shifts in economic policy. The net impacts of these and other factors figure to be negative in the near term, testing the vaunted resilience of the U.S. economy. NAHB’s baseline forecast shows a pronounced deterioration of GDP growth during the period ahead―with negative readings in both the fourth quarter of this year and the first quarter of 2009, followed by a gradual recovery during the rest of 2009 and resumption of trend GDP growth by 2010. 

Meanwhile, the statement issued by the Federal Reserve at the conclusion of the August 5 meeting of the Federal Open Market Committee highlighted “tight credit conditions” and noted that “financial markets remain under considerable stress,” despite the Fed’s stimulative monetary policy and the maintenance of its innovative liquidity-enhancing measures. The Fed's perspectives on this front are proving to be right on target. Like earlier rounds of stress during the past year, the most recent round of financial market turmoil has been provoked largely by developments in the housing finance system.

Symptoms of broad-scale credit market stress have once again shown up as widening quality spreads in bond and mortgage markets. Lower-rated corporations have to pay very large spreads over comparable-maturity Treasury securities, and even highly-rated corporations have to pay abnormally large spreads over Treasury rates. Moreover, the Fed’s recent Senior Loan Officer Opinion Survey, conducted in mid-July, documents a progressive tightening of lending standards in all major components of U.S. credit markets, including commercial real estate loans—a category that includes multifamily construction and land development loans. NAHB’s surveys of builders have also been identifying substantial cumulative tightening of lending standards on land acquisition, land development and construction loans in recent quarters, and the Fed’s survey suggests that there's more of this to come down the line.