NAHB Says Economy Is Out of the Woods

The National Association of Home Builders is pleased with the current pace of the U.S. economy. In a recent “Eye on the Economy” e-Newsletter, NAHB Chief Economist David Seiders said the U.S. economy is definitely out of the woods despite the impression that economic expansion has fallen by the wayside. “The U.S. economy has shown impressive resilience to external shocks, including record global oil prices and terrorist outbreaks in London, and the economy is displaying solid fundamentals that should carry us forward for some time to come,” Seiders says. “Indeed, we figure that the current expansion, which began at the end of 2001, is now moving into its ‘middle innings’ and has a long way to run.”

LABOR MARKET. According to Seiders, the labor market is now performing well with a payroll employment increase of 146,000 in June as shown by preliminary data from the Labor Department. The average monthly gain for the second quarter now stands at 181,000, compared with 190,000 for the first quarter and 172,000 for the past 12 months. NAHB’s forecast shows maintenance of jobs growth in this range through 2006.

Additionally, the June labor market report showed an unemployment rate of 5 percent, down from 5.1 percent in May and 5.6 percent a year ago. “We expect the unemployment rate to hang around the current level for some time, and an anticipated rise in the labor force participation rate should help maintain enough slack in labor markets to support solid growth in employment and output through 2006 and beyond,” Seiders says.

CORE INFLATION. Seiders says the core inflation picture also has improved despite ongoing economic expansion and oil price shocks. “Extended periods of above-trend growth in economic output (real GDP) typically generate upward pressures on core inflation, at least partly through the labor market,” he says, noting exclusions of the prices of food and energy. “Strong growth of labor productivity can hold off these pressures, particularly in the early stages of an economic expansion when productivity surges naturally, but at some point labor costs typically become an inflation force. That’s happening in the U.S. now, and some inflation impulses also are coming from commodity prices and non-oil imports.”

With inflation top of mind at the Federal Reserve, Seiders says the Federal Open Market Committee has explicitly reserved the right to “fulfill its obligation to maintain price stability” as the Fed moves gradually toward a position of monetary neutrality.

“In this regard, recent news on producer and consumer price inflation has been rather reassuring,” he conitnues. “The Producer Price Index (PPI) for finished goods was dead flat in June, and the core component of the PPI showed a year-over-year advance of only 2.2 percent – the slowest since last November. The Consumer Price Index (CPI) also was flat in June, and the core CPI was up by only 2 percent on a year-over-year basis – the slowest since last October. The technically superior chain-core CPI showed only a 1.8-percent gain, the same as in May.”

The May report on personal income and consumer spending also provided an encouraging read on inflation (June data are not yet available). Indeed, the Fed’s favorite inflation gauge, the core price index for personal consumption expenditures (PCE), held at a year-over-year rate of 1.6 percent, while the market-based core PCE price index held at 1.7 percent –  the same as the average for the previous six months. These readings are within the Federal Reserve’s apparent “comfort zone,” as suggested by economic projections contained in the Fed’s semi-annual Monetary Policy Report to the Congress that was delivered by Fed Chairman Alan Greenspan on July 20-21. However, the upper end of the FOMC’s projected ranges is only 2 percent for both 2005 and 2006, leaving little room for acceleration from the recent pace.

HOUSING MARKET STRENGTH. With a strengthening economy, Seiders reported a strong performance from the housing market in the second quarter, adding that the third quarter of 2005 has also started on a high note. Total housing starts held firm in June at a 2.004 million pace and starts averaged more than 2 million units for the second quarter as a whole. The single-family market was particularly strong, as starts averaged 1.67 million for the quarter.

Issuance of residential building permits increased by 2.4 percent in June to a seasonally adjusted annual rate of 2.1 million units. Single-family permit issuance nudged up 1.3 percent to a rate of 1.649 million units for the month and the pace of multifamily permit issuance was up 6.5 percent. “In the process, the backlog of unused single-family permits rose to an historically high level,” Seiders says. “Builders obviously are facing very strong demand for homes, and drawn-out regulatory processes in many local jurisdictions have encouraged builders to accumulate an unusually large supply of unused permits to be able to meet anticipated housing demand.”

Home sales and house prices continued to move ahead in June, showing the strength of demand. Indeed, sales of existing single-family homes and condo/co-op units both hit new records on a national basis and all regions but the Midwest posted record numbers; furthermore, price appreciation accelerated further in both markets, showing year-over-year gains of nearly 15 percent. The median price for homes sold in June was $214,800, down from $227,400 in May. That was probably caused by a change in the regional and segment sales mix. There is no evidence that prices are being reduced to stimulate sales.

HOUSING FORECAST. “The recent strength of the single-family market has provoked another upward revision to NAHB’s forecasts for home sales and housing starts in 2005 and 2006,” Seiders says. “We’re now projecting 2.004 million total starts for 2005, up by nearly 3 percent from last year, and the forecast shows a record 1.653 million single-family units. We’re projecting total starts of 1.894 million in 2006, with 1.554 million single-family units – down by 6 percent from 2005. The anticipated setback is based primarily on our forecast of the interest rate structure as well as expectations for a less aggressive adjustable-rate mortgage (ARM) market and a reduced presence of speculators in the single-family and condo markets.” (Read the June 29 issue of Eye on the Economy for a discussion of these two topics).

NAHB expects national average home price appreciation to slow to some degree in 2006 as sales volume recedes, but the pace of price gains should not fall below the long-term average (around 5 percent). Price declines could occur in some local markets in 2006, but widespread declines are just about out of the question as long as our forecasts for the economy and the financial markets turn out to be on target.