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Gauging the State of the Economy

0 1931 Market Intelligence

Bernie Markstein

Positions: Chief Economist
Well known for his work as Senior Economist and Vice President of Economic Forecasting and Analysis for the National Association of Home Builders (NAHB), Dr. Markstein has provided analysis on national and regional housing issues; tracking developments, trends in the multifamily housing market and forces affecting building materials prices.

Economists

Reed Construction Data/'s Chief Economist Bernard Markstein blogged about the good news - bad news on the state of the economy.

Just how bad is the U.S. economy these days?

Recent economic reports have been discouraging with the Bureau of Labor Statistics (BLS) employment report at the top of the list. The BLS reported May total non-farm payroll employment rose a scant 69,000 at a seasonally adjusted annual rate (SAAR). This number is below the roughly 100,000 minimum most analysts believe is necessary to absorb the growth of the labor force and well below the over 200,000 that prevailed from December through February, a number that gave a flicker of hope to improving the overall employment situation.

Further, the BLS revised down the gains originally reported for March and April by a total of 60,000. Meanwhile, the May unemployment rate rose to 8.2% from April’s 8.1%.

Other less than stellar numbers include: > Durable goods orders were flat in April after dropping 3.7% in March on a seasonally adjusted (SA) basis. > Nondurable goods orders were down 1.1% in April after falling 0.7% in March. But is it as bad as it seems?

The poor economic numbers may reflect an unwinding of the positive disruption from the unusually mild winter weather, which was magnified by the seasonal adjustment process. Thus, taking a broader view, economic performance was neither quite as strong as previously reported, nor quite as weak as more recent data have indicated.

At the same time, it is clear that both businesses and consumers are concerned about the current U.S. economic situation and developments abroad. In particular, the problems in Europe (with the current focus on Spain even as Greece continues to deteriorate) are a major worry. Already a number of European countries have slipped into recession while growth in others has slowed, adversely affecting exports to Europe in general. Although the U.S. has a relatively low direct dependence on exports to Europe, it is hurting other major world economies such as China that have a greater reliance on European exports. The U.S. has an indirect exposure as economic growth in those countries slows due to lower exports, potentially reducing their imports of U.S. goods.

Further uncertainty has been introduced from the political side as the federal government approaches the debt ceiling once again and the expiration of the Bush tax cuts at the end of this year. With growing concern among businesses about the future of government policies and the future of demand for their products, there is a greater reluctance to hire or invest at present.

Reasons for Optimism

Nonetheless, there are some positives for the economy. Although faster growth is clearly desirable, the economy is growing. Despite the uncertainty previously noted, some businesses have considerable pressure on them to invest.

Having delayed most investment over the past few years, many businesses are faced with the need to replace aging equipment. This is most evident with trucks and automobiles. Part of the reason that auto and truck sales have been so good over the last few months is that businesses have been forced to replace some of their aging vehicles. This demand is rippling through the economy, helping the manufacturing sector.

Similarly, companies have been, and are likely to continue to be, forced to hire workers to meet their increases in demand. Already, nonfarm private employers have added almost 2 million workers to their payroll over the past 12 months.

The recent decline in gasoline prices reverses a drain on the consumer’s pocketbook. This will add to people’s ability and willingness to spend. And not just the consumer—this helps businesses as well, reducing their transportation costs.

The deal over the weekend to provide Spain with up to a 100 billion euro loan to help with its bank problems shows that the Europeans will address each crisis as it arises. A program that provides long-term solutions to Europe’s problems would be preferable, but this deal at least keeps the European economy from falling off the cliff – although teetering on the brink.

Signs of Life Emerge in Housing

Housing, which had much to do with our current woes, is showing signs of improvement, though from a low base.

  • Single-family housing starts increased to 492,000 (SAAR) from 481,000 in March, which was revised up from the previous month’s report of 462,000 starts.
  • April’s 475,000 single-family building permits were their second highest level in two years.
  • Single-family new home sales of 343,000 in April were also at their second highest level in two years.

With the inventory of new homes for sale at 146,000 near its March record low of 144,000, any uptick in demand will quickly translate into more construction.

Meanwhile, multifamily housing has been improving for several months now. Multifamily starts increased to 225,000 (SAAR) from March’s 218,000. The three-month moving average, which smoothes out much of the month-to-month volatility of multifamily starts, was 230,000 for April, the highest average since November 2008. Meanwhile, April’s three-month moving average of multifamily building permits of 257,000 is the highest the measure has been since October 2008.

The outlook for multifamily construction is positive. Continued low interest rates, falling vacancy rates (first quarter vacancy rate of 8.8% was the lowest rental vacancy rate since second quarter 2002), and rising rents are all positive for the sector. Rising rents and lower home prices have made the purchase of a home extremely attractive.

Demand for single-family housing is being held back by three factors:

  • Consumer fear of ownership following the decline in home prices over the past few years.
  • The inability of current homeowners to sell their houses at prices that are acceptable to them (in some cases, “acceptable” is enough to pay off their existing mortgage).
  • Difficulty in obtaining a mortgage at a reasonable interest rate unless one has stellar credit, despite the current historically low interest rates.

Nonetheless, housing demand is inching upward.

Conclusion

The economy has hit a rough patch. We have seen too many of these periods of slow growth during the current recovery. It was just a year ago when we hit a similar slowdown. And although we certainly would like to see faster growth, the economy is still moving forward, if slowly. The economy faces threats from Europe to Washington that could jeopardize our fragile recovery. It is as much a fear of possible bad outcomes that is hurting the economy—a self fulfilling prophecy, as the actual problems.

Some of these uncertainties could be removed if only the actors, e.g. our political representatives in Washington, would take some reasonable action in a timely manner (we aren’t pinning our hopes or our forecast on this outcome!). Nonetheless, there are positives from the need by businesses to invest to lower gasoline prices to a modest housing market recovery.

The economy may not be great, but it is not as bad as some would paint it. And slow growth beats no growth.

What Do You Think?

Have you seen improvement in the economy?  Leave a comment with your thoughts and stories.

by Bernie Markstein

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