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ECONOMISTS SAY RECESSIONARY
PERIOD TO BE 'SHORT, SHALLOW'
WASHINGTON, DC -- (November 16) --The economy is now heading into what is projected to be a mild, brief recessionary period that will be followed by a rebound in the second quarter of 2002, said economists at the Semiannual Construction Forecast Conference held by the National Association of Home Builders (NAHB) yesterday. |
"Following a meager 0.3 percent advance in the second quarter and a 0.4 percent contraction in the third quarter, the economy definitely is continuing to weaken in the final quarter of 2001," said NAHB Chief Economist David Seiders.
The good news is that recovery is not too far off. "Assuming continued success of ongoing military endeavors and that no additional serious terrorist activity occurs in the U.S., we're projecting a 2.5 percent contraction in the fourth quarter followed by an additional 0.5 percent setback in the first quarter of 2002 before positive growth resumes in the second quarter of next year," Seiders said.
"We'll be referring to this as 'the early 2000s recession' - but it won't be nearly as bad as past recessions," he continued. With unemployment running at around 5.4 percent currently, Seiders expects some uptick - to 6 percent - by the middle of next year. This figure typically lags behind economic growth rates and so will not recover as quickly as Gross Domestic Product (GDP). "But, putting things in perspective, unemployment is still well below what we've seen in past recessions."
The housing market, which has been a crucial source of strength to the overall economy, will not be immune to the effects of further economic weakening this year, Seiders noted. "Total housing starts will decline about 10 percent in the fourth quarter, to a 1.44 million-unit rate, then begin a recovery process in early 2002." On an annual basis, NAHB projects housing starts will hold at around 1.57 million units for 2001 and 2002 (slightly below the 2000 pace) and then rise to a robust 1.67 million units in 2003 as pent-up demand returns to the market.
On the single-family side, Seiders estimates that housing production will hit 1.25 million units for all of 2001 - up almost one percent from last year - and then remain nearly that high, at 1.24 million units, for all of 2002. Multifamily starts should be down about 4.4 percent to 326,000 units this year, then rise by just over 2 percent next year to 334,000 units.
Heralded recently as a "bright spot" in an otherwise dim economy, residential fixed investment posted solid growth in the first half of 2001 before weakening somewhat in the third quarter. Seiders now predicts a 14 percent contraction in the fourth quarter, with only a slight negative growth rate in the first quarter before the measure resumes positive growth through the latter part of 2002 and beyond.
Due to the mildness of this recession and the "immense amount of home equity accrued in recent years" from improving home values, residential remodeling will remain relatively strong through the next three quarters, said Seiders. "This segment has positive momentum due to recent high levels of existing home sales." He added that "One of the real success stories in this era is homeownership, which has continued to expand all year and should keep moving up from a strong 67 percent."
Seiders' fellow chief economists, Maury Harris of UBS Warburg and Michael Moran of Daiwa Securities America, largely concurred with his forecast. Both cited numerous reasons to believe that the American economy will not dip too far or too long in the wake of September's terrorist attacks. For example, they lauded the sound monetary policy adopted by the Federal Reserve, which began lowering interest rates in January of this year.
In previous recessions, the Fed didn't begin lowering rates until negative growth set in - and, according to Moran, "It takes six months for the stimulative effects of these moves to materialize." The fact that the Fed has moved so promptly this time bodes well for a quick recovery. All of the economists predicted that the Fed will lower the federal funds rate by at least a quarter-point at each of the next two meetings of its Federal Open Market Committee (FOMC) in December and late January. After that, they predicted, the Fed will likely hold off on further loosening of monetary policy at the FOMC's March meeting as signs of recovery emerge. Given these expectations, they believe long-term mortgage rates will remain in the 6.4 to 6.6 percent range through the rest of this year and most of 2002.
Other factors pointing to a quick economic turnaround include indications that travel and shopping behavior are returning to normal after Sept. 11. "With the passage of time and more visible demonstrations of public safety, people will go back to normal spending and investment habits," Harris predicted. Government figures on retail sales for October, released the day of the forecast conference, also bode extremely well, he said. In comparison to an expected 2.5 percent gain, the retail sector expanded by a whopping 7 percent that month.
Harris also noted that the rate of technological change and innovation - demonstrated by the number of patents granted in the year to date - remains quite strong, and he cited recent surveys indicating that Americans believe life in the post-Sept. 11 era will "return to normal" or better than normal before long.
Another positive factor is the fiscal stimulus package now being debated in Congress, which Harris believes is "likely" to pass this year and "will probably pump another $90 billion into the economy."
Michael Moran of Daiwa Securities was slightly more upbeat about the prospects for an economic recovery taking hold as early as the first quarter of next year. "A small increase in GDP is possible in early 2002," he said. "In all, this will be a short, shallow recession," thanks to prudent business inventories, a trade imbalance that is causing foreign producers to shoulder some of the effects of weakened consumer demand, and Congress's expected economic stimulus package.
Moran also noted that "The household sector is in much better shape than the media has reported." The overall assets-to-liabilities picture for individual households is not bad, he said, in part because of the surge in mortgage refinancing activity which is helping many households better manage their debt.
In another conference seminar, Fannie Mae Chief Economist David Berson and Freddie Mac Deputy Chief Economist Frank Nothaft addressed the question of whether house prices are headed for a fall as the economy weakens. They concurred that home appreciation will decline to a rate of about 2.5 to 3 percent in 2003 - down from an average 8 percent for the last year. "But that's still a comfortable margin above zero," Berson said.
"Will home values crash? Absolutely not," said Nothaft. "House-price growth will slow, but mitigating factors such as fiscal and monetary stimulus measures and continuing low inflation and interest rates will keep things from getting out of hand. Our view is that housing markets across the country are very well balanced."
Lending an historical perspective, Berson said, "On a national basis, in the last four recessions home values did not drop." He and Nothaft also credited the very favorable inventory situation in the home building sector for their confidence that no market glut is forthcoming. "New-home inventories are exceedingly lean," said Nothaft, and little speculative building is taking place. "Right now there is no evidence of overbuilding - which is far from what was the case when we entered the last recession in 1990."
The National Association of Home Builders is a Washington-based trade association representing more than 205,000 members involved in home building, remodeling, multifamily construction, property management, subcontracting, design, housing finance, building product manufacturing and other aspects of residential and light commercial construction.NAHB is affiliated with more than 800 state and local home builders associations around the country. NAHB's builder members will construct about 80 percent of the more than 1.5 million new housing units projected for 2001. During a typical year, residential construction accounts for about five cents of every dollar spent in the U.S. economy, making home building one of the largest and most influential industries in the country.