Check out the latest from the respected Economists of the National Association of Home Builders.
The Road to Recovery Is Bumpy, But Showing Slow Improvement
Can less negative be considered an improvement? Well, when it comes to the economy, it’s better than more negative.
In the final estimate of real (inflation-adjusted) growth in gross domestic product (GDP) for the first quarter of 2009 by the Bureau of Economic Analysis, GDP fell 5.5% at a seasonally adjusted, annual rate. However, this decline was less than the bureau’s preliminary estimate of a 5.7% drop, or the 6.1% decline of its advance report – which is notoriously inaccurate because of the large amount of data missing when the early finding is compiled.
This compares to the fourth quarter 2008 estimates of declines of 3.8% (advance report), 6.2% (preliminary report) and 6.3% (final report).
The back-to-back, substantially negative quarters are certainly painful indicators of an economy in a sharp recession. Nonetheless, the trend indicates that the worst is over, that the decline is slowing and that we will see growth re-emerge.
NAHB estimates that the just completed second quarter of 2009 resulted in a 1.2% decline in real GDP. Looking forward, we expect the economy to expand at an average annual rate of 1.5% in the second half of 2009.
To date, a relatively small amount of the first stimulus package has been spent. Approximately $90 billion of the $789 billion package, or 11%, went into the economy by the end of June, and more of that money is expected to flow into the economy as summer road projects ramp up.
By the end of the year, about $250 billion should be injected into the economy. Typically, it takes six to nine months for the effects of government spending and tax cuts to spread throughout the economy.
Meanwhile, monetary policy remains expansive as the Federal Reserve works to offset the contractionary forces of the financial markets problems, and there is some evidence that parts of the financial markets are returning to normal.
As the need for the Fed’s support in these areas has abated, however, the Fed has pulled back, reducing some of the stimulus of its actions.
Even as the problems in the financial markets ease a bit, lending standards are tightening. Individuals and companies with excellent credit histories are still facing difficulties in obtaining loans. They are being denied loans outright, asked to provide for larger down payments or facing other onerous requirements. This is acting as a drag on the economy and slowing any recovery.
June Employment Loss Represents a Big Bump for the Economy
The loss of 467,000 jobs in June was an unpleasant shock to those who thought we were seeing slow improvement in the jobs market. In May, “only” 322,000 jobs were lost, a definite improvement over the first quarter’s average loss of 691,000 jobs.
Still, this report should be kept in perspective. Although we cannot rule out unexpected bumps, such as June’s jobs report, we expect employment losses to slow over the remainder of the year. We are looking for job gains, albeit small, in the first half of 2010.
The unemployment rate rose from 9.4% in May to 9.5% in June. Ironically, when the economy begins producing jobs again, the unemployment rate is likely to rise as people who had left the labor market out of frustration start seeking jobs again. We expect the unemployment rate to top out near 10% early next year.
Employment losses and rising unemployment rates will be the face of the recession even as output improves and various sectors move from contraction to expansion in coming months.
Employment is always the last to respond, what economists call a lagging indicator. It does not make the pain any less, but it does help keep things in perspective as the economy rights itself.
Inflation Remains Moderate, Smoothing the Road
Despite the concern of several economic commentators, inflation continues at a moderate pace. In June, the Consumer Price Index (CPI) rose 0.7% from May on a seasonally adjusted basis. However, the index fell 1.4% from June of last year. Excluding volatile food and energy prices – energy prices dropped 25.5% while food prices rose 2.1% – the index actually was up a modest 1.7% from June 2008.
The Producer Price Index (PPI) is reporting similar numbers – up 1.8% in June from May, on a seasonally adjusted basis, but down 4.6% from June 2009. Taken together, the two indexes suggest that inflation is not an immediate problem.
Those raising the inflation alarm are concerned about the large amount of liquidity that the Federal Reserve has pumped into the financial system. They note that when governments and central banks print too much money, inflation results. However, they ignore the massive deleveraging that has occurred in the financial system over the past two years.
If the Fed had not partially offset this deleveraging by adding liquidity to the system, the economy would have fallen even further, undoubtedly producing significant deflation.
The Fed’s liquidity injection has not led to increased borrowing because most of it replaces current borrowing and has not produced increased spending. Instead, it has kept spending from declining further than it has, preventing a sharper drop in economic growth.
As long as there is significant slack in the economy, there is little danger from inflationary forces. Certainly as the financial markets improve and lending moves towards some form of normalcy, there will be a need to withdraw some of the liquidity that the Fed injected into the market.
At this point, the greater danger would be if the Fed, in reaction to all the criticism, withdraws too much liquidity too fast. Such an action would push the economy into another downward slide. This is exactly what happened during the 1930s when the economy was beginning to revive and fears of inflation – which arose in the midst of massive deflation, nonetheless – led the Fed into serious monetary error.
This is not a mistake that Federal Reserve Chairman Ben Bernanke and his crew are likely to make.
Building Materials Prices Improve, But a Rougher Road May Lie Ahead
Not surprisingly, during a typical housing recession, building materials prices moderate, giving some relief to builders, remodelers and new home buyers. Certainly that was the expectation in the current housing cycle, where overbuilding contributed to large increases in many building materials prices.
In fact, some materials prices have fallen dramatically – notably lumber, gypsum and insulation. But other prices – notably in steel, copper, cement and energy – have continued to rise due to demand outside residential construction. The net effect, until recently, was to see overall building materials prices rise at a fairly rapid pace.
More recently, with the worldwide recession, demand for industrial products has fallen, sending related product prices down. Steel prices, which peaked in third quarter of 2008, are now back around their 2004 level. However, its current price is significantly higher than steel prices as recent as 2001 and 2002.
Copper prices have been volatile, increasing dramatically starting in the latter part of 2003 until the middle of 2006; falling in early 2007; and then driving to new highs later that year and again in 2008. After peaking in April 2008, prices continued to fall until February. By June, they rebounded to levels comparable to those seen in spring 2006.
Cement prices rose significantly from 2004 through early 2007 and have been essentially flat since then. The movements of energy prices, which drive a lot of building materials prices, are well known.
Softwood lumber prices, which hit a peak of $473 per thousand board feet in August 2004 and fell to a low $195 in March of this year, have risen back to $222 as of June, according toRandom Lengths. Some of this bounce-back represents producers closing unprofitable operations, which reduced supply. A similar story can be told for gypsum and insulation manufacturers.
The rate of increase in overall building material prices moderated in the latter half of 2006 and through 2007. But then, beginning in September 2007, materials prices rose dramatically through the first three quarters of 2008 – up 9.0% for single-family builders and 9.3% for multifamily builders by September 2008 from 12 months before.
Prices have now fallen somewhat. As of June, they are down 2.0% for single-family builders and 4.6% for multifamily builders from their June 2008 levels. Nonetheless, June prices are still up 3.4% for single-family builders and 1.9% for multifamily builders from the end of 2007.
Although there may be some further downward pressure in the near term on many of these prices, once the world economy is back on a growth path and residential construction is further along in its recovery, building materials prices can be expected to increase again.
The Housing Market Continues to Be Jostled, But Is on the Road to Recovery
The housing market is clearly negotiating the roughest road of this recession/recovery. All the month-to-month volatility makes one nervous about declaring a bottom in the market.
However, the crucial first step to recovery in the housing market – stabilization of demand – appears to have occurred.
Single-family existing home sales, which averaged 4.1 million in the first quarter of this year, averaged 4.2 million for April and May. May’s reading of 4.25 million single-family sales at a seasonally adjusted, annual rate was the highest rate since October of last year. While many of these sales are foreclosed homes and short sales, clearing out the inventory of foreclosed homes is necessary.
New home sales seem to be struggling more, but they are slowly improving. First quarter sales averaged 339,000. April and May averaged 343,000 – a small but definite improvement.
Clearly, competition from foreclosed homes, wariness among potential home buyers, recession fallout, stiff lending standards and overly conservative – and in some cases, undervalued – appraisals are all acting as a drag on the new home market.
Nonetheless, builders are successfully paring their inventory of new homes. At of the end of May, builders had 292,000 houses for sale. This is down from peak inventory of 572,000 at the end of July 2006 and 453,000 from May 2008.
The May months’ supply at 10.2 months – it would take 10.2 months to sell builders’ current inventory of houses at May’s sales pace – is still too high, but it partially reflects the abysmally low sales rate.
If builders continue to reduce their inventory, as seems likely, and sales advance, the months’ supply will fall towards a more normal level. As it is, months’ supply is down from an all-time high of 12.4 months in January of this year, a result of reduced inventory and a higher sales rate.
Downward pressure on home prices continue, but at a moderating rate. Although still down on a year-over-year basis, prices (not seasonally adjusted) in eight of the 20 cities in theS&P/Case-Shiller Home Price Index increased from March to April.
Even though downward price pressure can be expected in markets with large inventories of homes for sale and distressed properties, those areas seem to be largely confined to the formerly hot markets, such as southern Florida and California, and the economically distressed areas, primarily the Great Lakes region of the upper Midwest.
More and more communities outside of these areas (and even some in these areas) will see prices stabilize and, in some cases, move higher.
The “bumps” already experienced and still ahead will make for a slow housing recovery, but one that will move in a positive direction. NAHB expects starts to be just over a half million in 2009 and about 650,000 in 2010 as we move toward full production by 2012 or 2013