The downward revision for the fourth quarter reflected weaker numbers for many components of GDP, including consumer spending, business inventory investment, net exports and nonresidential fixed investment — including production of nonresidential structures.
The housing production component of GDP (residential fixed investment) was revised only slightly, showing a 22.2% rate of contraction that knocked 0.78 of a percentage point off the overall GDP growth rate for the fourth quarter.
That’s quite a large drag from a relatively small component of the economy (about 3%) that’s been falling for three full years.
Another Stock Market Debacle Deepens Economic Problems Early This Year
The stock market apparently had hit bottom early last November, and the market managed to stage a modest recovery over the balance of 2008.
But then the equity market took another major leg downward, carving another $2 trillion from household net worth and decimating the attitudes of consumers, businesses and financial market participants alike.
The market has rallied in recent days, on the backs of financial companies of all things, but the market remains deeply in bear territory and the durability of the recent rally is highly in doubt.
Available evidence on economic activity for the early part of 2009 points toward contraction of all major components of real final sales (inflation adjusted) other than spending by the federal government on national defense.
Another major decline in GDP definitely is in the cards for the first quarter — we’re currently estimating -5.5% — even if the stock market continues to improve over the balance of this month.
With respect to housing production, we’re expecting residential fixed investment to contract at an annual rate of about 40% in the first quarter, the largest quarterly contraction of the entire downswing. This is virtually inevitable in the wake of a massive downshift in housing starts late last year and early 2009 that’s taking residential construction put-in-place down sharply at this time.
Labor Market Deterioration Has Picked Up Steam
The current recession began at the end of 2007 when the job market started to lose ground, and the labor market has been deteriorating rapidly through February. According to the latest figures, nonfarm payroll employment has declined by 4.4 million since the recession began, and more than half of that decline, 2.6 million, has occurred during the last four months.
Residential construction (builders and specialty trade contractors) continues to be an important part of the deteriorating employment story, shedding 911,000 jobs since its peak in February 2006 and losing 226,000 during the last four months alone.
The unemployment rate has been moving up substantially from the cyclical low of 4.4% in 2007 and major increases have been recorded in recent months.
Indeed, the civilian unemployment rate jumped from 7.6% in January to 8.1% in February, the highest reading since 1983. The Labor Department’s broadest measure of labor “underutilization,” including discouraged workers and those working only part time for economic reasons, soared to a lofty 14.8% in February — up by more than five percentage points over the past year.
Further deterioration of the labor market is inevitable, for both the housing sector and the overall economy. We expect large payroll job losses to persist through the second quarter and we expect the unemployment rate to peak out above 9% around the end of the year.
Home Sales Should Be Stabilizing Soon
Large cumulative declines in home prices in many areas, combined with attractive interest rates on prime conventional conforming fixed-rate mortgages (salable to Fannie Mae or Freddie Mac) and an FHA/VA loans, have generated substantial improvements in housing affordability measures even as the deepening recession has taken a toll on median household income.
Surveys of consumer sentiment (University of Michigan) showed relatively large proportions of households saying in both January and February that it was a “good time” to buy a house, primarily because of low prices and low interest rates.
Improving sentiment has not yet shown through in official home sales data. Sales of new homes, as reported by the Commerce Department, and “pending” sales of existing homes reported by the National Association of Realtors® (both based on contract signings) declined substantially in January, reaching new cyclical lows.
NAHB’s proprietary survey of large single-family builders, available through February, is providing some tentative encouraging signs.
Seasonally adjusted gross sales (new orders) have been essentially flat since last November, and seasonally adjusted net sales showed a modest recovery over that period as sales cancellations continued to move downward in absolute terms.
NAHB’s broad-based single-family Housing Market Index also was essentially flat during the November-February period, albeit at or near the record low for the series, and preliminary tabulations point toward more of the same in March.
NAHB’s baseline forecast shows a bottoming-out of sales of both new and existing homes in the first quarter of this year, aided and abetted by key provisions of the economic stimulus bill that was signed into law on Feb. 17 — the $8,000 refundable, but not repayable, tax credit for first-time buyers and the boosting of loan limits for both the government-sponsored enterprises (GSEs) and FHA back to 2008 levels.
Everything Now Depends on the Strength of Economic Policy
The economy recently has gone from bad to worse, despite a variety of economic policy supports put in place late last year.
The fate of the economy and the housing sector now depend very heavily on the strength of President Obama’s three-legged policy stool, along with complementary monetary policy support from the Federal Reserve. Policy actions by foreign governments also will be part of the policy puzzle.
There are major question marks about all of this:
- Will the recently enacted fiscal stimulus bill be large enough, with enough short-term stimulus, to fill widening holes in key components of private spending?
- Will Treasury Secretary Tim Geithner’s
Regarding the credit markets, the recently launched Term Asset-Backed Securities Loan Facility (TALF), a cooperative venture involving the Fed and Treasury, holds out promise for selected consumer and small-business asset-backed security (ABS) markets — and possibly for commercial as well as private-label mortgage-backed securities markets.
But it’s too early to tell how much difference the much-heralded TALF will make.
The resolve and skill of economic policymakers will determine the length and depth of the current recession and the dimensions of the ensuing recovery and expansion.
It does appear that policymakers have agreed, explicitly and implicitly, to prevent more “systemically important” major financial institutions from going belly-up. (Lehman Brothers was an unmitigated disaster for the markets.)
If that’s the case, and if a decent measure of financial stability is restored in reasonably short order, then the recent judgment by Fed Chairman Ben Bernanke that, “…there is a reasonable prospect that the current recession will end in 2009 and that 2010 will be a year of recovery,” looks like a good bet.
That’s the guts of NAHB’s current baseline forecast, although the range of risk remains unusually wide.
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