Housing Data Mixed

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By David F. Seiders, Chief Economist, National Association of Home Builders

GDP growth slowed in the second quarter, and we’re now estimating a below-trend 2.7 percent pace. Furthermore, we expect growth to hang around 3 percent during the second half of this year and in 2007, a modestly below-trend pace that will restore a bit of slack to resource markets, particularly the labor market. We’re viewing the 2006-2007 slowdown as a healthy mid-cycle correction that should lead to more years of sustainable growth without recession. Housing is serving as a major swing factor in the evolving economic growth saga. Residential fixed investment (RFI) was a major engine of economic growth between 2002 and 2005. However, RFI made relatively small contributions to GDP growth in both the final quarter of 2005 and the first quarter of 2006, and RFI growth definitely swung into the negative zone during the second quarter of this year.

Employment growth slowing toward trend
Three years of average above-trend GDP growth generated solid growth in employment and systematically reduced the degree of slack in U.S. labor markets as demonstrated by a falling unemployment rate from the cyclical high in mid-2003 to an expansion low of 4.6 percent in both May and June. The evolving (and projected) slowdown in GDP growth should prevent the unemployment rate from falling further, and NAHB’s forecast shows an upward drift during the second half of this year and in 2007.

The payroll employment survey for June showed a net gain of only 121,000 jobs (there was a modest decline in construction employment), and the average monthly gain for the second quarter came to only 108,000. That’s an annualized gain of roughly 1 percent, a bit below sustainable trend growth, and our forecast shows payroll employment growth in that range for the next six quarters.

Growth of average hourly earnings accelerated in June, despite the slowdown in payroll employment growth, adding to concerns about gathering upward pressures on prices of goods and services produced in the U.S. economy. Indeed, average hourly earnings for June were up by 3.9 percent on a year-over-year basis, and the three-month annualized increase came to 4.7 percent, which is one of the largest increases during the past decade.

Inflation continues to firm up
The extended period of above -trend economic growth, along with associated shrinkage of slack in U.S. labor markets, has generated growing concern on the inflation front. The Fed has been increasingly worried about upward pressures on “core” inflation (excluding prices of food and energy) from tightening labor markets as well as from soaring energy prices that inevitably have been making their way into the core through business cost structures.

Core inflation readings for the first quarter of 2006 were well contained, at least on a year-over-year basis, though various measures definitely firmed up on a quarter-to-quarter basis. The core Consumer Price Index is on an upward path, showing year-over-year increases of 2.3 percent and 2.4 percent in April and May, respectively—not far below our estimate of the upper bound of the Fed’s tolerance zone for this inflation measure (2.5 percent).

The Fed’s favorite inflation gauge, the core price index for personal consumption expenditures (PCE), has also been elevated in recent months. The year-over-year rise in May was 2.1 percent, the same as in April, but the annualized gains over the past one, three and six months were well above our estimate of the upper bound of the Fed’s tolerance range for this measure (2 percent). For a central bank preoccupied with containment of inflation pressures, the acceleration demonstrated by the core PCE price index has been quite troublesome.

Housing Data Mixed
NAHB’s surveys of builders showed deepening problems in the single-family market through June, as our Housing Market Index fell to the lowest level since April 1995. Builders also reported rising cancellations and inventories as well as resales by investors/speculators of homes closed on earlier.

Furthermore, ongoing erosion in single-family and condo markets is shown by sales/price data for the existing-home market through May (based on closings). We’re also seeing a distinct downslide in issuance of single-family building permits (data through May), and recent reports from public home builders have shown substantial declines in new orders, rising cancellations and rising inventories of units for sale.

Conflicting (positive) signals are coming from a number of government and private sources. Data reported by the Commerce Department for May showed increases for both single-family housing starts and sales of new homes, and the National Association of Realtors® series on “pending” sales of existing homes (based on contracts signed) perked up a bit in May. Furthermore, a weekly series on applications for mortgages to buy homes (from the Mortgage Bankers Association) moved up a bit at the end of June (four-week moving average basis). Despite the conflicting signals, it seems fair to say that single-family and condo markets still are cooling down in fundamental ways and that the housing slowdown still has some distance to run.

The National Association of Home Builders is a Washington, D.C.-based trade association whose mission is to enhance the climate for housing and the building industry. Chief among NAHB’s goals is providing and expanding opportunities for all consumers to have safe, decent and affordable housing.

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