MultiFamily Market Outlook - 07/30/2008 (Plain Text Version)

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In this issue:
Multifamily Stock: Troubled Times A Thing of the Past?
New York Building Code Surges Multifamily Starts
Real Rents Decline For the Second Consecutive Month
Forecast: U.S Economy Shifts Toward Inflation

Forecast: U.S Economy Shifts Toward Inflation

Real GDP growth has been running seriously below trend for several quarters and the labor market has been weakening systematically since late last year. That pattern promises to persist over the balance of the year and into 2009, producing a “growth recession” if not an official economic recession.

NAHB’s forecast shows a pickup in GDP growth for the second quarter, although the projected pace still qualifies as below-trend. The major danger zone for the U.S. economy has shifted to the second half of this year, largely reflecting “payback” for the fiscal stimulus that’s supporting consumer spending during the middle two quarters of the year. A dwindling drag from housing, further improvements in our trade balance and a policy-related firming of business capital spending will be needed to keep the economy afloat as consumer spending weakens late this year.

The Federal Reserve held monetary policy steady at the June 24-25 meeting of the Federal Open Market Committee (FOMC). This kept the federal funds rate target at 2.0% and the discount rate at 2.25%. Thus the real (inflation-adjusted) funds rate remains slightly in the negative zone, clearly an “accommodative” monetary policy stance.

The June 25 FOMC statement expressed a good bit of concern about the near-term prospects for economic growth, citing “tight credit conditions, the ongoing housing contraction, and the rise in energy prices.” But the statement definitely upgraded inflation concerns, stating that “upside risks to inflation and inflation expectations have increased.”

It’s fair to say that the Fed’s view of the balance of risk to the U.S. economy has shifted toward the inflation side, but the FOMC statement was neutral—consistent with a stable policy stance for now. NAHB believes that the Fed will continue to talk tough about inflation risks but maintain the current monetary policy stance over the balance of this year and into the beginning of 2009—as long as inflation moderates (as expected) and inflation expectations in the private sector do not rise substantially. But once it’s clear that the economic recovery is on solid footing, the Fed will start to move monetary policy back toward neutral in relatively short order.